6321 Conveyances to 3rd Parties page3

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[63-1 USTC ¶9343]Logan Planing Mill Company, a Corporation, Plaintiff v. Fidelity and Casualty Company of New York, a Corporation, et al., Defendants

U. S. District Court, So. Dist. W. Va., Huntington, Civil Action No. 1058, 212 FSupp 906, 12/20/62

[1954 Code Sec. 6321]

Tax lien: Priority: Assignment of payments due under contract.--Assignment by a contractor, for the benefit of his surety and the surety's indemnitor, of all payments due or to become due under a contract vested ownership in the assignee. Rights of the surety and indemnitor to funds in the hands of the assignee-trustee were superior to the rights of the government under its subsequently assessed tax lien.
[1954 Code Sec. 7421]

Jurisdiction: Restraint on collection of taxes.--Prohibitions against restraint on collection of taxes apply only to taxpayers and not to third parties.

William G. Wilson, 307 White & Browning Bldg., Logan, W. Va. , for plaintiff. William C. Beatty, Huddleston & Bolen, 900 First Huntington Nat'l Bank Bldg., Huntington 18, W. Va., for Fidelity & Casualty Co. of N. Y., defendant. Harry G. Camper, United States Attorney, Frank Eaton, Assistant United States Attorney, Huntington, W. Va., Wallace E. Maloney, Department of Justice, Washington 25, D. C., for U. S. R. A. Woodall, 850 Lincoln Co., Lincoln Nat'l Bank, Hamlin, W. Va., for Board of Education of Lincoln County, defendant.

WATKINS, District Judge:

This action was brought by plaintiff to quiet title to a fund of money ($12,285.44), held by the Board of Education of Lincoln County, West Virginia, which the United States claims by virtue of a tax lien. Plaintiff, Logan Planing Mill Company, and defendant, Fidelity and Casualty Company of New York , claim the fund by virtue of an assignment in trust prior in point of time to the assessment of the tax. Many legal questions and some factual questions have been raised, but this court finds that the assignment was valid and effective, and is superior to the tax lien.

[Facts]

R. V. Pauley Construction Company (hereinafter called "Contractor") was the low bidder on each of three school building contracts for Lincoln County , West Virginia . The contracts were for $36,919.39, $82,537.72 and $43,983.68, respectively, and in the total amount of $163,440.79. The awarding of the contracts required the Contractor to furnish a performance and payment bond for each job in the amount of the contract price. ¹ The Contractor's financial condition was such that it could not obtain a surety on the three bonds on its own credit. When it applied to defendant, Fidelity and Casualty Company of New York (hereinafter referred to as "Surety") for bonds, the Surety declined to enter into such an arrangement unless the Contractor had obtained some additional, independent, outside indemnitor which would pledge its credit and guarantee to indemnify the Surety against loss on any or all of the performance bonds. Other conditions were also imposed by the Surety, which required the Contractor to segregate the entire contract proceeds, when payable, and to designate a trustee or third party to hold such proceeds to assure the Surety and plaintiff, Logan Planing Mill (hereinafter referred to as "Planing Mill") as Indemnitor, that the contract proceeds would not be commingled with Contractor's funds and to insure that such proceeds were applied to payment of the labor and material costs on each of the three contracts. Accordingly, the Contractor made arrangments with Planing Mill, in early August, 1959, to pledge the latter's credit to the Surety as the Contractor's Indemnitor and for Dan Lassiter (who was acceptable to all parties as a reliable and independent third party) to act as assignee of the contracts' proceeds, to handle and pay out for labor and materials only, the contract proceeds which were to be delivered to him. This separate handling of the contract proceeds by Lassiter was a condition for Planing Mill's lending its credit as indemnitor. About August 17, 1959, the Board of Directors of Planing Mill authorized it to enter into these contractual arrangements and on August 19, 1959, it executed the three indemnity contracts. About the same time the Contractor executed and delivered bond application forms for the three bonds, although the application forms were not then dated. It was then understood by the parties that the Contractor would complete the details of the written assignment of contract proceeds to Dan Lassiter by procuring and delivering to the Board and to Dan Lassiter a proper written agreement. Such an assignment was prepared and executed by the Contractor as of September 2, 1959 (prepared at Contractor's request by its attorney) and a copy thereof was submitted to Planing Mill and approved by it on or about September 30, 1959, by a written memo thereon signed by W. W. Bryan for the Planing Mill and likewise approved and accepted by Dan Lassiter at the same time by his written name on the same copy thereof, which was returned and kept by the Surety. The written assignment was, in general terms, a complete assignment of all the contract proceeds under each of the three contracts, and specified the contracts and the amount thereof. The terms of the alleged trust arrangement under which Dan Lassiter was to act were agreed to by the parties verbally and were established in the oral testimony of the witnesses. The execution of the bond application, the arrangement for indemnification by Planing Mill, the designation of Dan Lassiter as alleged trustee and arrangements for his handling and payment of the contract proceeds for labor and materials, and the execution of the assignment of September 2, 1959 (which assigned to Dan Lassiter specifically and by reference to each construction contract all of the contract proceeds) were all a part of the same original transaction, although some of the details, such as the making of the written assignment, were completed at a later date. The construction contracts and the performance and payment bonds were executed by the Board of Education (hereinafter referred to as "Board" or "Owner") and by the Contractor and Surety, on August 31, 1959, and were duly recorded on September 10, 1959. The amount of the performance bonds executed by Surety was exactly the same in each instance as the amount of the construction contract.

A copy of the contract was not served upon the Board by the Contractor as he agreed to do, but the Contractor did proceed with the contracts. The contracts provided that on the 20th of each calendar month, the Board was to pay 90% of all labor and materials incorporated in the project up to the first day of that month, and the final payment of the last 10% of contract proceeds was to be paid 30 days after substantial completion, provided the work was then fully completed and the contract fully performed. Progress payment checks were made by the Board, under all three contracts, to Contractor, which endorsed the same and delivered them to Lassiter from time to time, pursuant to the assignment, beginning about September 14, 1959, to and including March 15, 1960. Payments dated May 5, 1960, and June 14, 1960, on all jobs, totalling $11,919.00, were kept and retained by the Contractor and were never delivered to Lassiter. All other payments made were delivered to Lassiter and by him deposited in his special checking account in The National Bank of Logan , at Logan , West Virginia . This special bank account was opened by him on September 18, 1959, at which time he deposited with the bank a photo copy of the executed assignment of September 2, 1959, and this special account was entitled "R. V. Pauley Construction Company, Dan Lassiter, Agent." The sum of $20.53 still remains in this account.

The Contractor presented its requisition to the trustee for payroll requirements, and Lassiter then made payments for such labor to the Contractor, and the Contractor then issued its own checks to each employee on account of that labor. Payments for material bills (less 10%) were made directly by Lassiter to suppliers. Although the construction contracts called for 10% of the contract sum to be retained to cover any defect in construction or for payment of unpaid labor and material claims, nevertheless, all of the contract proceeds had been paid out except $200 each on the Barrett Bend and Midkiff jobs, while as of June 14, 1960, all but $11,885.44 had been paid on the Hart's High School job.

The Surety, through its Richard Gainer, communicated monthly with Lassiter to insure that bills for labor and materials were being paid on time as they accrued. In May, 1960, the Surety determined that the Contractor was in default in payment of material bills, and on June 20, 1960, when Gainer visited Lassiter's office, he found that $2,240.00 was due and unpaid by the Contractor to one supplier of material. He also found that all but $200.00 had been paid out by the Board on each of two jobs. Soon thereafter, numerous unpaid material bills for materials delivered to these jobs were presented to the Surety for payment, and payment was made by the Surety. The names of these suppliers, the dates of delivery, and dates of payment, are covered in a stipulation signed by the parties. Beginning October 21, 1960, when the first payment was made, through May 9, 1961, the Surety paid out a total of $26,156.20 on claims for the Contractor's unpaid material bills on these three contracts. On November 17, 1961, Planing Mill, by reason of its agreements to indemnify Surety and save that Company from loss by reason of the three bonds, made a payment of $7,500.00 to Surety as part payment against losses sustained by Surety under such bonds.

The assignment of September 2, 1959, was not initially served on or delivered to the Board. Dan Lynch, and Gainer for the Surety, called on J. O. Midkiff (the Board's Superintendent of Schools) on August 25, 1960, and requested him not to pay anything further to the Contractor and advised Midkiff of the assignment. A copy thereof was sent to the Board by Lassiter with the latter's forwarding letter of August 26, 1960. By letter dated September 9, 1960, Lynch wrote Midkiff to demand that the retained proceeds be delivered to the Surety to pay for material bills, etc., purchased on these jobs. After June 14, 1960, no further progress payments were made by the Board. At the time the Board filed its answer, it had $12,285.44 in its hands to be distributed as the court might direct. After the Board filed its answer in this case, stating that it held the sum of $12,285.44 for distribution by the court, it paid out the sum of $1,693.70 on March 13, 1961, without court order, and amended its answer accordingly to show that it now holds only $10,591.74 for distribution. This payment was made to the State Tax Commissioner of West Virginia for Business and Occupation Taxes (Sales tax), owed by the Contractor on these jobs under Ch. 11, Art. 13, sec. 16, W. Va. Code, which provides as follows:

"All state, county, district and municipal officers and agents making contracts on behalf of the State of West Virginia or any political subdivision thereof shall withhold payment in the final settlement of such contracts until the receipt of a certificate from the tax commissioner to the effect that all taxes levied or accrued under this article against the contractor have been paid. Any official violating this section shall be guilty of a misdemeanor and, on conviction thereof, shall be fined not more than one thousand dollars or imprisoned not exceeding one year in the county jail, or shall be subject to both said fine and imprisonment, in the discretion of the court."

Planing Mill and Surety concede and this court finds that this tax was superior to all claims in this case, and the court now approves of such payment. The West Virginia Supreme Court has so held in Moran v. Lacscey Smokeless Coal Co., 122 W. Va. 405, 10 S. E. 2d 578; Fidelity & Deposit Co. of Maryland v. County Court of Lewis County, 123 W. Va. 409; 155 S. E. 2d 302.

Hart Construction Company was engaged by the architect to finish the work on that school which had not been completed by the Contractor, and this work was done between September 16, 1961, and October 16, 1961, at a cost of $411.59, which was paid by Surety. The architect did not issue his final completion and payment certificates directing payment of the balance of the proceeds on completion of the contracts until November 30, 1961.

What are the present tax claims and when were they assessed? Since this action was started the taxpayer-contractor and the Internal Revenue Service have adjusted the earliest of the tax liabilities (1959 Corporate Income Tax, assessed July 15, 1960, in the total amount of $3,417.60), except for a non-interest bearing item of $27.96. The Government's next claim, is chronological order is that for second quarter, 1960 Withholding and FICA Taxes, which was originally in the total amount of $3,731.23, assessed August 26, 1960, but with interest was in the amount of $4,132.78 on March 17, 1962. The Government's next claim in order of priority is that for the third quarter 1960 Withholding and FICA Taxes, originally in the amount of $2,783.46, plus interest, under an assessment dated December 16, 1960, but with interest was in the amount of $3,018.83 on May 17, 1962. The Government's last claim is for a balance due on 1960 FUTA Taxes, in the original amount of $1,147.26, but on May 17, 1962, was (after allowing credit for payment on April 3, 1962, of $118.00) $1,065.95, including interest to May 17, 1962. The maximum claim of the Government, under all of its claims, is $8,245.52, of which $8,217.56 is interest bearing. Since this suit was instituted, other claims have been filed by the Government for taxes, but all such claims were assessed subsequent to the filing of this suit and are not involved in this controversy. By virtue of Section 6321 and 6322 of the Internal Revenue Code of 1954, a federal tax lien attached to all "property and right to property" belonging to the taxpayer at the time the assessment was made. The Government contends that the money owing under the construction contract was property of the taxpayer to which the tax lien attached.

[Ownership of Fund]

The principal question for decision is the ownership of this fund held by the Board at the time the taxes were assessed and levied. The Government claims that the prior alleged assignment did not transfer title or control of the fund out of the Contractor, and that Lassiter was only serving as agent for the Contractor. With this contention I cannot agree. The Surety and Planing Mill contend, and the court finds, that the assignment transferred title to the fund to Lassiter as trustee for the benefit of Surety and Planing Mill, as well as for the benefit of the Board, which was also interested in seeing that the labor and material claims were promptly paid. The Contractor was not the owner of the fund at the time the taxes were assessed. Testimony was taken upon this issue of fact and the case was submitted to the court for decision.

It is true that witnesses referred to Lassiter many times in the oral testimony as "agent," and it is also true that the money was deposited in his name in the bank as "agent," but the courts do not look so much to the technical name given a person as they do to the relationship created by the oral and written acts of the parties, to determine the true legal position he holds. The fact that a party calls a lease a deed, or calls one who is serving as trustee as an agent, would not change the true legal situation. Substance, not form or labels, controls the nature and effect of legal instruments. Here the assignment, the need for such assignment, the purpose it was to serve, with accompanying oral arrangements, the manner in which it operated after execution, all show that there was imposed upon Lassiter fiduciary duties rather than reposing in him authority to act for a principal or to represent a principal. Lassiter was vested with title to the funds and managed them only according to the terms of his trust; that is to say, for payment of labor and material claims only. The fact that he could not and did not use the money for other purposes, that the funds were to be segregated and that Lassiter agreed to this, is evidence of the trust relationship. The record is devoid of any facts to show an agency relationship, except that Lassiter was often described as "agent."

In its brief filed in this court, the Government argues, in support of the agency relationship, that "In this indirect way, both Mill and Surety were more secure under their obligations since the Contractor would not have control of the funds and could not waste or misappropriate the funds." There can be no doubt that this is an accurate statement of exactly what was intended and was accomplished by the parties. It is equally clear that such a position is not consistent with ownership of the funds by the Contractor or mere agency on the part of Lassiter, for under mere agency, the Contractor would have the right to complete dominion and control over the funds, either in its hands or the hands of its agent, with the right to misappropriate the funds or spend them in any was it saw fit. This was an assignment of the entire contract proceeds in trust for the purpose mentioned, and such an assignment was a condition imposed by the Surety and Planing Mill before they would agree to act for the Contractor. A trust arrangement was actually established, not only because there was a written assignment to Lassiter, but, in addition, there were trust or fiduciary duties imposed on him. A trust may be accomplished by an express declaration of trust or by circumstances indicating an intention of the depositor to place the fund irrevocably beyond his control to be used for certain purposes.

[Non-Assignment Clause]

Reliance is also placed by the Government on a non-assignment clause in the General Conditions of the construction contracts. The condition provides that the contract shall not be assigned or sublet, nor the monies due thereunder assigned without written consent of the owner, which written consent was never obtained from the Board. The Board's answer does not contest the validity of the assignment and admits as "substantially true" all the allegations of the complaint, including detailed allegations as to how the assignment was made and the trust created. This provision was for the protection of the Board and Surety, and even if this provision was violated by the Contractor, such violation would not prevent transfer of title if the Board interposed no defense on this ground. The non-assignment provision will not avail the Government in this case. The provision is personal to the Board and could furnish the Board a defense in other circumstances, but it cannot be used by the Government for the purpose it asserts.

Another point raised by the Government is that if title is vested in Lassiter as trustee, this action cannot be brought by Planing Mill, an alleged beneficiary. Not only are the plaintiff and Surety trust beneficiaries and, as such, entitled to bring an equitable action, but as Surety and Indemnitor, they have equitable and legal rights whether Lassiter wishes to bring action or not. The real party in interest and the party which will be liable to the Surety for any loss it sustains is Planing Mill. Lassiter, the Board, the Surety, and all other interested parties are made parties to this action.

[Jurisdiction of the Court]

The Government filed a motion to dismiss, alleging that the court is without jurisdiction since this is a suit to enjoin the collection of a tax in violation of Section 7421 of the Internal Revenue Code of 1954. In opposing this motion, the parties claim that this is not such a suit as is prohibited by Section 7421; that the money held by the Board is not the property of the taxpayer-Contractor by reason of the assignment thereof by the Contractor to Lassiter, as trustee; that, therefore, this is a suit to enjoin the wrongful taking of a third person's property to satisfy a tax debt, and that such a suit is not within the prohibitions of Section 7421.

The cases support the position that the purpose of Section 7421 is to prevent suits by the taxpayer to contest taxability and to bar collection of the tax asserted; but that the prohibitions of Section 7421 have no applicability to suits to protect property of a non-taxpayer which the Government has seized to satisfy a taxpayer's liability. See Hubbard Investment Co. v. Brast, 4 Cir., [1932 CCH ¶9366] 59 F. 2d 709, 710; Adler v. Nicholas, 10 Cir., [48-1 USTC ¶9205] 166 F. 2d 674. The court denied the motion to dismiss until it could determine whether the taxpayer owned the money held by the Board, and by reason of the decision now made it appears that this is an action to protect the property of a non-taxpayer and is not prohibited by Section 7421. Before the court ruled on the motion to dismiss, plaintiff struck from its complaint the prayer for injunctive relief, whereupon the Government joined in an agreed order, dated November 9, 1961, stating in part as follows:

"It appearing from said letter and from the pleadings in this case that all parties who have heretofore appeared herein are desirous of and seek determination by this Court of the right, title, and interest to the funds in question, now being held by the Board of Education of Lincoln County, and that upon determination of such right, title and interest that the Court will order payment thereof to the party determined to be entitled thereto after determining the respective rights of the parties in such fund, and that no injunctive proceedings against either the United States or the Collector of Internal Revenue will be necessary, the plaintiff moved to amend its Complaint * * *,"

by striking the prayer for injunctive relief, which motion was granted and the motion to dismiss was denied.

Section 7421 was formerly Section 3224, and relates to taxpayers only. In Long v. Rasmussen, D. C. Mont., 281 F. 236, the Court stated, in speaking of Section 3224:

"The Revenue Laws are a code or system in regulation of tax assessment and collection. They relate to taxpayers and not to non-taxpayers. The latter are without their scope."

The Rasmussen case was cited in Rothensies v. Ullman, 3 Cir., [40-1 USTC ¶9308] 110 F. 2d 590, where the Court stated:

"We think that the Section of the Internal Revenue Code which we have quoted was not intended to deprive the Courts of jurisdiction to restrain Revenue officers from illegally collecting taxes out of property which does not belong to the person indebted to the government."

See also Seattle Association of Credit Men v. U. S., 9 Cir., [57-1 USTC ¶9402], 240 F. 2d 906, in a case similar to this case, where the Court held that a federal district court had jurisdiction to enjoin the enforcement of a levy such as that alleged in this complaint. It was there contended, as here, that the suit was to enjoin the collection of a tax in violation of Section 7421. If the Contractor was the owner of the fund at the time of the tax assessment, then the situation would be different. Here the complaint alleges, and the court has held, that the Contractor was not the owner of the fund when the assessments were made.

The Government also urges that this court has no jurisdiction for another reason. It says that 28 U. S. C., Section 2410, only waives sovereign immunity and does not grant independent jurisdiction to bring this action to quiet title. Section 2410(a) provides:

"Under the conditions prescribed in this section and section 1444 of this title for the protection of the United States, the United States may be named a party in any civil action or suit in any district court, * * * or in any State court having jurisdiction of the subject matter, to quiet title to or for the foreclosure of a mortgage or other lien upon real or personal property on which the United States has or claims a mortgage or other lien."

It is clear that this statute does waive sovereign immunity and by its very terms contemplates that the United States will be sued as a party in the situation where it is also a lien claimant in a disputed fund. It must be read in conjunction with 28 U. S. C., Section 1340 and Section 2463, the latter of which provides:

"All property taken or detained under any revenue law of the United States shall not be repleviable, but shall be deemed to be in the custody of the law and subject only to the orders and decrees of the courts of the United States having jurisdiction thereof."

In Gerth v. United States, D. C. S. D. Cal.,[55-2 USTC ¶9692] 132 F. Supp. 894, 896, the court stated:

"Section 2463 of Title 28, United States Code, has repeatedly been held to give jurisdiction to United States District Courts in suits by a party other than the taxpayer to quiet title to property or establish priority of liens as against a claim or lien asserted by the United States against the taxpayer under any internal revenue law. In re Fassett, 1892, 142 U. S. 479, 12 S. Ct. 295, 35 L. Ed. 1087;Stuart v. Chinese Chamber of Commerce of Phoenix, 9 Cir., 1948, [48-2 USTC ¶9315], 168 F. 2d 709; Long v. Rasmussen, D. C. Mont. 1922, 281 F. 236; Rothensies v. Ullman, 3 Cir., 1940 [40-1 USTC ¶9308], 110 F. 2d 590; Raffaele v. Granger, 3 Cir., 1952, [52-1 USTC ¶9321], 196 F. 2d 620."

See also William T. Plumb, Jr., in his article on Tax Collection and Lien Problems, 13 Tax Law Review (Part 2) No. 4, p. 537, where he refers to Section 2463 and stated:

"That provision has been construed as an affirmative grant of jurisdiction to the federal courts, no independent grounds being required, to entertain any action other than replevin with respect to property levied upon."

Section 1340 of Title 28, provides:

"The district courts shall have original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue, or revenue from imports or tonnage except matters within the jurisdiction of the Customs Court ."

In Ersa, Inc. v. H. A. Dudley, 3 Cir., [56-2USTC ¶9621], 234 F. 2d 178, the Court said:

"* * * this court has also held that the district court of the district in which the property is located has jurisdiction in a proceeding such as this to determine whether a levy for federal taxes was illegally made upon property belonging to one other than the indebted taxpayer.Rothensies v. Ullman, 3 Cir., 1940, [40-1 USTC ¶9308], 110 F. 2d 590; Raffaele v. Granger, 3 Cir., 1952, [52-1 USTC ¶9321], 196 F. 2d 620. As pointed out in those cases that jurisdiction is derived from sections 1340 and 2463 of title 28, United States Code, which give to the appropriate district court power to make orders and decrees with respect to property taken or detained under the federal revenue laws. * * *"

See also Seattle Association of Credit Men v. United States, supra; Raffaele v. Granger, 3 Cir., [52-1 USTC ¶9321], 196 F. 2d 620; National Iron Bank v. Manning, D. C. N. J., [48-1 USTC ¶9306], 76 F. Supp. 841;Szerlip v. Marcelle, D. C. N. Y., [56-1 USTC ¶9118], 136 F. Supp. 862; Ersa, Inc. v. H. A. Dudley, supra. For the reasons stated, there is no merit in this contention of the Government.

The Government also says that this court has no jurisdiction to quiet title to personal property because there is no action to quiet title to personal property under West Virginia law, and if there was such action, it would be necessary under West Virginia law for Planing Mill to show that it had both legal and equitable title to the fund. There is no merit in this point because this is not an action brought to quiet title under West Virginia law. It is an action authorized under Federal law, 28 U. S. C., Sections 2410, 2463, and 1340.

It is also said that the plaintiff gave no consideration. The lending of its credit and its undertaking in the written contract is a valuable consideration for the assignment.

[Effect of the Assignment]

The Government also says that the claim of Planing Mill and Surety cannot be honored because they were inchoate, citing R. F. Ball Construction Co. v. United States, [58-1USTC ¶9327] 355 U. S. 587, 78 S. Ct. 442, 2 L. Ed. 2d 510. But this case is not analogous to Ball. Here we do not have an assignment to secure a future contingent indebtedness, but an assignment to prevent a future indebtedness, an assignment of a known, fixed sum in trust for application to particular claims. The Ball case involved assignment of retainages on a Texas project to pay for default on a Kentucky contract, where the same surety had bonded it. Four justices dissented, even there taking the position that the assignment was choate, fully executed, and had the status of a mortgage under Texas law. In Ball there was default and subsequent claim asserted, but here default was not awaited; on the contrary, the entire contrast proceeds were assigned, in trust, for payment for completion of the contract, not as security for a debt; and here the Surety commenced payment of material claims on October 21, 1960, and paid a total of $18,367.30 on claims before the Government filed its first tax lien on November 3, 1960, a payment much more than the amount of the proceeds now retained by the Board.

In addition to the written assignment to Lassiter, as trustee, there was also an assignment in the application for these bonds by the Contractor to Surety, which was pleaded and is in evidence. The assignment to Lassiter, dated September 2, 1959, is not governed by Ball. It was specific in nature, and effect was promptly given to it by depositing money with the trustee thereunder and the immediate commencement of payment by the trustee of labor and material claims. The Government says that there is no assignment, other than that contained in the bond applications, which are inchoate underBall and, therefore, the first two of the Government's claims are entitled to priority after which (and because of the payments made by the Surety in October and November, 1960), the Surety's equitable claim has thereby become choate so as to entitle the Surety to the balance of the fund. Even under this theory of the Government, it admits it would only be entitled to recover from the fund the first two claims of $4,132.00 with interest, and $27.96, without interest. The Government does say that the Surety has not pleaded this assignment (with which statement the court does not agree) and, therefore, the Government has a lien for all of its tax claims pleaded.

This reasoning is not logical because it completely ignores the existence of the Lassiter assignment, the testimony of witnesses, the handling of the fund by Lassiter through his account at the bank, and excludes consideration of all the other transactions, conversations and dealings of the parties. The Lassiter assignment was actually carried out and treated by the parties as immediately effective and operative, and except for the unlawful retention of a part of the fund by R. V. Pauley, the assignment in trust was fully carried out.

It is true that the Government tax lien arises as of date of assessment and attaches to all the property of the taxpayer, and any competing lien must also be perfected or choate. A lien is deemed choate when the identity of the lienor is determined and the property subject to the lien and the amount of the lien are established. The claim of the Surety here is not a lien (strictly speaking) since no contractual lien was created. This was a completed transaction in that the assignee-trustee was specifically known and designated, the amount assigned was definite, certain, in the exact amount of each contract sum, the property which was the subject of the contract was definite and known, and, of the total of $151,219.35 paid on the contracts by the Board before the Government levy, $139,300.26 was actually delivered to Lassiter under the trust arrangement, although $11,919.00 was, without right or authority, retained by the Contractor. The was, therefore, more than the ordinary security arrangement which was the subject ofBall.

The claim of Planing Mill and Surety is entitled to priority on the theory of no property in the taxpayer. But even when applying the test of "choateness," I find that the assignment will pass the test. This was an assignment in substance as well as form, and is of greater dignity than a security arrangement or a lien.

The Government has filed a cross claim against Surety, in which it claims that the Withholding and FICA taxes for the second, third and fourth quarters of 1960 are a portion of the cost of labor arising out of the three construction contracts, and that Surety should be required to pay such costs of labor. There is no merit in this contention. The Fourth Circuit Court of Appeals has held that the contractor's taxes are not payable under the bond. See U. S. v. Crosland Construction Co., 4 Cir., [55-1 USTC ¶9112], 217 F. 2d 275, in which the Court said:

"We agree with the Fifth Circuit: 'Though measured by the amount of wages, the money due the United States was owing as taxes and not as wages'. General Casualty Co. of America v. U. S. , 205 F. 2d, at page 775."

To the same effect, see U. S. v. Phoenix Ind. Co., 4 Cir., [56-2 USTC ¶9659], 231 F. 2d 573; U. S. F. & G. Co. v. U. S., 10 Cir., 201 F. 2d 118; and U. S. v. Seaboard Surety Co., N. D. Tex., 201 F. Supp. 630.

[Pearlman Case]

The foregoing was written prior to the decision of the Supreme Court in Pearlman, Trustee, v. Reliance Insurance Company, decided December 3, 1962, -- U. S. --. There the Supreme Court held that (even in the absence of any express assignment) the Surety, which paid labor and material bills incurred by a government contractor, had ownership of an equitable lien on, or a prior right to retained percentages from the date of execution of the bond and contract on the theory of subrogation alone. Thereafter, Planing Mill and Surety amended their pleadings to assert right to the fund on the additional theory of subrogation.

In Pearlman there was a dispute between Pearlman, as trustee in bankruptcy of Dutcher Construction Corporation, (which in April, 1955, entered into a contract with the United States to do work on the St. Lawrence Seaway project) and the contractor's payment bond surety over which had the superior right and title to a fund withheld by the Government out of earnings due the contractor. One bond guaranteed payment to all persons supplying labor and materials for the project. The United States was authorized to retain and hold a percentage of estimated amounts due monthly until final completion and acceptance of all work under the contract. Before completion, the contractor had financial difficulities, the United States terminated his contract, and another contractor completed the job, which was finally accepted by the Government. At this time the Government was holding $87,737.35, which would have been due to be paid to the contractor had it carried out its obligations to pay its laborers and materialmen. The surety had to pay about $350,000.00 to discharge debts of the contractor for labor and materials. The fund held by the Government was paid to the trustee in bankruptcy, who held the fund on the assumption that it had been property of the bankrupt at the time of adjudication and, therefore, had vested in the trustee "by operation of law" under Section 70 of the Bankruptcy Act. The surety then filed a petition denying that the fund had vested in the trustee, alleging that the surety was the owner of the sum free and clear of the claims of the Trustee in Bankruptcy or any other person and seeking an order directing the trustee to pay over the fund to the surety forthwith. The referee denied this request, but the District Court granted the request, ² and the Second Circuit affirmed. ³

The Supreme Court stated:

"One argument against the surety's claim is that this controversy is governed entirely by the Bankruptcy Act and that §64, 11 U. S. C. §104, which prescribes priorities for different classes of creditors, gives no priority to a surety's claim for reimbursement. But the present dispute--who has the property interests in the fund, and how much--is not so simply solved. Ownership of property rights before bankruptcy is one thing; priority of distribution in bankruptcy of property that has passed unencumbered into a bankrupt's estate is quite another. Property interests in a fund not owned by a bankrupt at the time of adjudication, whether complete or partial, legal or equitable, mortgages, liens, or simple priority of rights, are of course not a part of the bankrupt's property and do not vest in the trustee. The Bankruptcy Act simply does not authorize a trustee to distribute other people's property among a bankrupt's creditors. ⁴ So here if the surety at the time of adjudication was, as it claimed, either the outright legal or equitable owner of this fund, or had an equitable lien or prior right to it, this property interest of the surety never became a part of the bankruptcy estate to be administered, liquidated, and distributed to general creditors of the bankrupt. This Court has recently reaffirmed that such property rights existing before bankruptcy in persons other than the bankrupt must be recognized and respected in bankruptcy. ⁵ Consequently our question is not who was entitled to priority in distributions under §64, but whether the surety had, as it claimed, ownership of, an equitable lien on, or a prior right to this fund before bankruptcy adjudication.

"Since there is no statute which expressly declares that a surety does acquire a property interest in a fund like this under the circumstances here, we must seek an answer in prior judicial decisions. Some of the relevant factors in determining the question are beyond dispute. Traditionally sureties compelled to pay debts for their principal have been deemed entitled to reimbursement, even without a contractual promise such as the surety here had. ⁶ And probably there are few doctrines better established than that a surety who pays the debt of another is entitled to all the rights of the person he paid to enforce his right to be reimbursed. ⁷ This rule, widely applied in this country ⁸ and generally known as the right of subrogation, was relied on by the Court of Appeals in this case."

The Court then cited with approval two prior decisions of the Supreme Court. Prairie State Bank v. United States , 164 U. S. 227 (1896) and Henningsen v. United States Fid. & Guar. Co., 208 U. S. 404 (1908), as follows:

"In the Prairie Bank case a surety who had been compelled to complete a government contract upon the contractor's default in performance claimed that he was entitled to be reimbursed for his expenditure out of a fund that arose from the Government's retention of 10% of the estimated value of the work done under the terms of the contract between the original contractor and the Government. That contract contained almost the same provisions for retention of the fund as the contract presently before us. The Prairie Bank, contesting the surety's claim, asserted that it had a superior equitable lien arising from moneys advanced by the bank to the contractor before the surety began to complete the work. The Court, in a well-reasoned opinion by Mr. Justice White, held that this fund materially tended to protect the surety, that its creation raised an equity in the surety's favor, that the United States was entitled to protect itself out of the fund, and that the surety, by asserting the right of subrogation, could protect itself by resort to the same securities and same remedies which had been available to the United States for its protection against the contractor. The Court there went on to quote with obvious approval this statement from a state case:

'The law upon this subject seems to be, the reserved per cent to be withheld until the completion of the work to be done is as much for the indemnity of him who may be a guarantor of the performance of the contract as for him for whom it is to be performed. And there is great justness in the rule adopted. Equitably, therefore, the sureties in such cases are entitled to have the sum agreed upon held as a fund out of which they may be indemnified, and if the principal releases it without their consent it discharges them from their undertaking.' 164 U. S. , at 239, quoting from Finney v. Condon, 86 Ill. 78, 81 (1877).

The Prairie Bank case thus followed an already established doctrine that a surety who completes a contract has an 'equitable right' to indemnification out of a retained fund such as the one claimed by the surety in the present case. The only difference in the two cases is that here the surety incurred his losses by paying debts for the contractor rather than by finishing the contract.

"The Henningsen case, decided 12 years later in 1908, carried the Prairie Bank case still closer to ours. Henningsen had contracts with the United States to construct public buildings. His surety stipulated not only that the contractor would perform and construct the buildings but, also, as stated by the Court, that he would 'pay promptly and in full all persons supplying labor and material in the prosecution of the work contracted for'. ⁹ Henningsen completed the buildings according to contract but failed to pay his laborers and materialmen. The surety paid. This Court applied the equitable principles declared in the Prairie Bank case so as to entitle the surety to the same equitable claim to the retained fund that the Prairie Bank was held to have. Thus the same equitable rules as to subrogation and property interests in a retained fund were held to exist whether a surety completes a contract or whether, though not called upon to complete the contract, it pays the laborers and materialmen. These two cases therefore, together with other cases that have followed them, ¹⁰ establish the surety's right to subrogation in such a fund whether its bond be for performance or payment. Unless this rule has been changed, the surety here has a right to this retained fund. * * *

"We therefore hold in accord with the established legal principles stated above that the Government had a right to use the retained fund to pay laborers and materialmen; that the laborers and materialmen had a right to be paid out of the fund; that the contractor, had he completed his job and paid his laborers and materialmen, would have become entitled to the fund; and that the surety, having paid the laborers and materialmen, is entitled to the benefit of all these rights to the extent necessary to reimburse it. ¹¹ Consequently, since the surety in this case has paid out more than the amount of the existing fund, it has a right to all of it. On this basis the judgment of the Court of Appeals is

Affirmed."

One justice dissented, and three others joined in a concurring opinion in which they reached the same result as the majority, but said that the surety is subrogated to the rights of the United States instead of being subrogated to the rights of laborers and materialmen.

In the Prairie Bank case, the bank had advanced money to pay the contractor for labor and material, and it was urged that the bank had an equitable lien upon the ten percent retained by the government paramount to any lien in favor of the surety, whose lien, it contended, only arose from the date of the surety's later advances made to pay labor and material claims upon the contractor's default. The Court held that the surety's subrogation must be considered as arising from and relating back to the date of the original contract and does not take its origin solely from the date payments were make by the surety.

[Ownership of Roperty Determined Under State Law]

Notwithstanding the decision in Pearlman, which involved a federal construction contract, it would still seem to be the law that with reference to private or state construction contracts, what constitutes property of the taxpayer is determined by state law. Once the tax lien has attached to the taxpayer's state-created interests, we go to federal law to determine the priority of competing liens asserted against the taxpayer's property or right to property. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, and U. S. v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522.

But whether we look to federal law or state law in deciding the property rights created in Planing Mill and the Surety under the facts of this case, we reach the same conclusion because I believe that West Virginia law is no different from the federal law set forth in Pearlman.

The Prairie Bank case and the Henningsen case, relied upon in the recent Pearlman case, were each cited with approval, under similar facts, by the Supreme Court of West Virginia as early as 1927 in State v. Coda, 103 W. Va. 676, 138 S. E. 324. After citing these cases and others, the Court said: "Under the principles of these cases, and under the public policy gathered from our statutes above referred to," the Court proceeded to hold that a contractor could not divert by assignment the money due him under his contract and bond to the detriment of the materialmen and his surety who obtained superior equitable rights upon execution of the bond and contract.

In the Coda case, the Du Pont Company, a materialman on a State Road Commission project brought suit against the contractor and surety on its bond for $2,637.15. The surety answered in the nature of a cross-bill, bringing in as parties certain persons holding assignments on a retainage fund held by the Commission, made the Commission a party, alleged that the money held was a trust fund in its hands to protect the surety, that there were conflicting claimants to the fund, set up that in the application of the contractor for its surety bond, the contractor had assigned all funds to become due it from the Commission for the protection of the surety; charged that the attempted assignments later given were without effect and void in so far as the surety was concerned. One of the assignees, Riley, filed an answer in which he claimed that the contractor was unable to meet its pay rolls in 1924; that he loaned it money which was used to meet such pay rolls on the road construction contract under a contract that he would be repaid out of moneys due and to become due from the Commission, as evidenced by an assignment of December 24, 1924, which he immediately filed with the Commission. He denied that the assignment in the application was valid and, if valid, it was never filed with the Commission and could not take preference over his assignment. The master commissioner to whom the case was referred held that the materialmen were entitled to the fund by virtue of the "bond and the law," the Court confirmed such holding, and on appeal the Supreme Court affirmed, using the following language:

"The law requires a bond to be taken to insure the performance of a road contract, and the assignee of the contract must take notice of that bond and its conditions. A surety has the right to stand upon the express terms of his agreement, and any change by his principal and the obligee in the contract to insure the performance of which he has become surety, without his consent, to his detriment or disadvantage, will relieve him from liability on the bond. Miller v. Stewart, 9 Wheat. (22 U. S.) 680, 6 L. Ed. 189."

The Supreme Court of West Virginia continued in Coda as follows:

"In the discussion of the equities as between Riley and the surety, the fact must not be overlooked that the materialmen (Du Pont and Standard Oil) have rights which must be protected and which are accorded in the decree. What claim or equity do these materialmen have to the fund? The road law (section 25, c. 43, Code) requires the commission to take a bond from the successful bidder on a road project, not to exceed one-half the contract price; and section 12, c. 75, Code, requires public legal bodies, such as the board of control, county courts, and the like, having authority to contract for the erection of any public building or other structure to be used for public purposes, to take a bond conditioned that, in the event the contractor shall fail to pay in full for material and labor used by him, then the contractor and surety therein shall become responsible to the materialmen and laborers for the full amount of such material and labor. A permanently improved highway is a 'structure,' within the meaning of this act. State ex rel. Sand & Gravel Co. v. Royal Indemnity Co., 99 W. Va. 277, 128 S. E. 439, 43 A. L. R. 552. The public policy of this state is to secure payment to the materialmen and laborers in the building of structures to be used by the public. These two statutes must be considered together. The commission recognized this requirement of the law, and the bond taken by it in this case is conditioned not only that the contractor shall well and truly perform the contract and save the state harmless, but 'shall well and truly pay all and every person furnishing material or performing labor' in the construction of the roadway, for which the contractor is liable. * * *

"Can the contractor, or the corporation standing in his shoes, divert by assignment to a general creditor the money due him under his contract and bond, to the detriment of the materialman and his surety? The contractor agreed with the commission that it would pay the materialmen. The provision for retaining moneys in the hands of the comission was for the benefit of the commission, and it was the duty of the commission to see that the fund so retained was used to discharge the obligation of the bond. Prairie State Nat. Bank v. United States , 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412. A similar situation arose in Ill. Surety Co. v. City of Galion (D. C.) 211 F. 161. There a construction company contracted with the city to build a sewer disposal plant, and gave bond, which provided, among other things, taht the construction company should pay for materials and labor used in the work. Later the construction company agreed with a bank that it would furnish money to enable it to pay its workmen, and the money received from estimates paid by the city should be applied to repayment of the money loaned. The surety was notified of the making of this contract, but made no response. Upon the final estimates coming in, the bank claimed the fund under the contract assigning the estimate money to it and as subrogated to the rights of the laborers. The surety company asserted that the fund was subject to the payment of the materialman's claims remaining unpaid, and that its equity was superior to that of the bank. The court held that the equity of the surety company was superior to that of the bank (which was a creditor), and that the surety was subrogated to the right of the contractor to the fund, but that the bank was not, and decreed that the fund be first applied to the liquidation of the unpaid claims of the materialmen and laborers, and that the residue, if any, be paid the bank. In the present case, the materialmen are directly seeking payment from the fund under the provisions of a similar bond. Chancellor Day, who wrote the opinion in the Illinois Surety Company case cited Henningsen v. United States Fidelity & Guaranty Co., 208 U. S. 404, 28 S. Ct. 389, 52 L. Ed. 547, Prairie State Bank v. United States, 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412, and United States v. Rundle (C. C. A.) 107 F. 227, 52 L. R. A. 505. These citations sustain Judge Day's opinion.

"Under the principles of these cases, and under the public policy gathered from our statutes above referred to, we are of the opinion that the Du Pont Company and Standard Oil Company claims against the fund are superior in equity to that of the appellant, who was a mere creditor, and therefore the decree giving them preference will not be disturbed. The question of the superiority of Riley's assignment in 1924 over that of the assignment claimed by the surety in the application made for the bond in February, 1923, is not controlling, and is of little importance."

It is significant that the Court did not base its opinion upon the written assignment, but upon the equitable right created in the surety upon execution of the contract and bond by reason of subrogation, as pointed out in point two of the Court syllabus, which reads as follows:

"In such case the equities of the surety on the contract bond, under its right of subrogation to the rights of the contractor, are superior to the money lending creditor, who is only entitled to be paid under his assignment the remainder of the fund after paying the materialmen and laborers for whose claims the surety has become liable under the contract bond."

In commenting on the Pearlman and Coda cases, the Government admits that Coda "states a theory of law very similar to that set forth by the Court in the Pearlman case," but says that the theory of Coda is severely restricted by the later case of Fidelity & Deposit Co. of Maryland v. County Court of Lewis County," 123 W. Va. 409, 15 S. E. 2d 302. I cannot agree. I believe that the Fidelity & Deposit Co. case can be distinguished on the facts. In that case the contractor had entered into a contract with the defendant for the construction of a jail and had given the required public construction bond with the plaintiff as surety thereon. After a time the contractor defaulted after it had been paid $55,000.00 out of the total price of $62,450.00. The County Court withheld a portion of the money under the terms of the agreement which allowed it to withhold a percentage of the amount due, and while that amount was held the State of West Virginia filed notice of lien for non-payment of the contractor's gross sales price under Code 11-13-12. The plaintiff's surety brought suit and the County Court intervened. The Circuit Court of Lewis County found that the surety was entitled to be subrogated to the funds in the hands of the County Court and was a superior claim to the gross sales tax. Upon appeal the Court held that under our gross sales statute the tax is a lien on all property of the taxpayer, including its contracts and amounts receivable thereunder and that such a lien has priority over the subrogation rights of the surety. The Court went on to say that the surety, while subrogated, in this case is not subrogated to rights of laborers or materialmen under lien claims because under the statute involved here requiring the bond and contract to be filed, materialmen and laborers do not have any mechanic's lien rights. In any event, it is also said that the statute takes a priority over mechanic's lien rights because the statute given it such a priority. This case was decided under the former Gross Sales Tax Lien Statute, which was enacted in Chapter 106, Acts of the Legislature, 1937, Effective March 13 of that year as Code 11-13-12, and which read as follows:

"A tax due and unpaid under this article shall be a debt due the State. It shall be a personal obligation of the taxpayer and shall be a lien upon all property used in the business or occupation upon which such tax is imposed and said lien shall have priority over all other liens and obligations except those due the United States."

It is true that the Court held that the retained fund was "property" of the contractor upon which the gross sales tax lien attached, but such result was reached because of the particular language of this statute making the tax a "lien upon all property used in the business or occupation upon which such tax is imposed and said lien shall have priority over all other liens and obligations except those due the United States." Of course, this language expressly subordinated all rights of materialmen, laborers, sureties or indemnitors, whether created by subrogation, assignment or otherwise. This language in the statute at the time the contract and bond were executed was binding on every one to the same extent as though the words were in the contract and bond when executed. And this is just as it should be, because it would be most unreasonable to hold that the earned income from the contract, out of which a major portion of the taxpayer's total income is derived, should be held exempt from this gross income tax because the income never became the property of the taxpayer. The Court said, at page 303:

"In most instances the contract is the one thing that enables the taxpayer to carry on his activities, and to say that accruals of earnings thereunder are not property and subject to the tax imposed on the gross income of the business is not, in our opinion, a reasonable construction of the statute under consideration. Furthermore, this being a tax imposed on income, it is logically the first subject of the tax, and in no event can be held exempt from the lien on property which the statute imposes." (Italics supplied)

The holding in the Fidelity & Deposit Co. case is not contrary to Pearlman or Coda. It is authoritative law only upon the facts and the construction of the statute there involved, and, at most, would be dictum as to other facts and other statutes. Full recognition and approval is given to Coda, but the opinion points out that Coda is not applicable where this gross sales tax statute is involved. The effect of the decision is to recognize the well-established theory of subrogation in Coda and to hold that these funds are property within the meaning of this particular statute, basing such conclusion upon sound public policy and the construction of this statute.

The Court also pointed out that:

"Every person who engages in the business of contracting in this state is subject to a burden in the form of a tax on the gross income of his business. When he enters into a contract, he must do so in the light of that burden, and so long as each pays the tax imposed there is no discrimination and all stand upon an equal plane."

The Court cited Coda with approval as follows:

"It is true that appellee paid in wages and for materials an amount in excess of any sum due the contractor from the county court on the completion of the work, and undoubtedly under the principle of subrogation would be entitled to be subrogated to the rights of laborers and materialmen for any amount so paid to them. This is held in State v. Code, 103 W. Va. 676, 138 S. E. 324; Capon Valley Bank v. State Road Commission, 111 W. Va. 491, 163 S. E. 44. This being a public building, coming within the terms of Code, 38-2-39, the laborers or materialmen could not acquire a lien upon the public structure, but they are protected under the bond required by said statute, and under the cases above cited, and general law, the surety on the bond executed thereunder would be entitled to be subrogated to their rights."

It is my opinion that Coda is still the law of West Virginia , and that under it Planing Mill and Surety are entitled to the fund on the theory of subrogation, in addition to their rights under the assignments.

Ball is not pertinent to this case because there the question was one of priorities, not one of ownership of the fund. In Ball the assignment was of a subcontractor to his surety as collateral security, not only for performance of its subcontract, but for the "payment of any other indebtedness or liability of the (subcontractor to the surety) * * *." There the subcontractor incurred other indebtedness not connected with the subcontract and completely independent of the subcontract. Under the broad language of the assignment, as collateral to secure the "payment of any other indebtedness or liability of the subcontractor to the surety," the surety claimed the fund under the theory that the assignment constituted a "mortgage" within the meaning of Section 3672(a) of the Internal Revenue Code of 1939, as amended, giving the surety a priority over subsequent tax liens. The Government asserted a superior right to the fund under its tax liens. Several creditors of the subcontractor, holding unpaid claims for material furnished and used in performing the subcontract, asserted priority to a portion of the fund over the claims of both the surety and the Government. Before conclusion of the trial, the materialmen's claims were satisfied. The court merely held that the tax claim was entitled to priority because under the facts of that case, the assignment was "inchoate and unperfected." Under these facts it is quite obvious why the Supreme Court in the recent case of Pearlman, Trustee v. Reliance Insurance Company made no reference whatever to Ball. It did not involve the property rights of unpaid laborers or materialmen. The claim asserted by the surety did not even involve the subcontract under which the bond was given. It did not involve the question of subrogation, or whether the surety was subrogated to the rights of the governmental agency or to the rights of the materialmen and laborers, the point over which the court divided in the Pearlman case.

[Decision]

In its cross claim the Government has claimed judgment against the Contractor for the full amount of taxes due it. The Contractor has not appeared or answered this claim. The Government has filed the proper affidavit seeking default judgment. It is entitled to such default judgment, and judgment will be entered for the full amount of taxes due it, plus interest, upon presentation of proper order.

Surety has already been required to pay and has paid for labor and materials, by virtue of the obligations in its bonds, far in excess of the sum of money now held by the Board. Planing Mill is liable to the Surety as indemnitor for all of such money. In its counter-claim against Planing Mill, the Surety asks for judgment against Planing Mill for the sum of $25,751.04 for its losses and expenses incurred to date of the filing of its amended counter-claim (March 31, 1961), and for the amounts owed by it under these three bonds as yet unpaid, but claimed by persons and firms set forth in its counter-claim. In its counter-claim Planing Mill asks that whatever amount it or Surety recovers in this action that the same be applied to the payment of Surety by way of reimbursement to it and as credit on such sums as it may have properly expended by virtue of its suretyship, and owed to it by Planing Mill as indemnitor. In its answer to such counter-claim, Planing Mill joins in such prayers for relief. Therefore, the order of this court will direct the payment of the money now held by the Board to be paid directly to the Surety for application as set forth above. Undetermined matters make it necessary that this case be retained on the docket for further orders to be entered herein.

I see no merit in other points raised by the Government. Since I am of opinion that the issues presented should be determined favorably to plaintiff and Surety, the claims of the United States are denied.

The statements above are adopted as the findings of fact and conclusions of law of this court.

¹ Ch. 38, Art. 2, Sec. 39, W. Va. Code, required the Board of Education to secure from the Contractor a valid and sufficient bond, conditioned upon the payment of all materials and labor used in the construction or repair of such public building, and providing that the "bond and the sureties thereon shall be responsible to such materialmen * * * and furnisher or performer of such labor, or their assigns, for the full payment of the full value thereof."

² In re Dutcher Construction Corp., 197 F. Supp. 441, D. C. W. D. N. Y. 1961.

³ 298 F. 2d 655 (C. A. 2d Cir., 1962).

⁴ See Justice Holmes' discussion in Sexton v. Kessler & Co., 225 U. S. 90, 98-99 (1912). As to the difficulties inherent in phrases like "equitable lien," see Glenn. The "Equitable Pledge", Creditors' Rights, and the Chandler Act, 25 Va. L. Rev. 422, 423 (1939).

⁵ United States v. Durham Lumber Co. [60-2 USTC ¶9539] 363 U. S. 522 (1960). See also Security Mortgage Co. v. Powers, 278 U. S. 149 (1928), and cases collected in 6 Am. Jur. Bankruptcy §249 (1950). Cf. Aquilino v. United States , 363 U. S. 509 (1960).

⁶ "The right of subrogation is not founded on contract. It is creature of equity; is enforced solely for the purpose of accomplishing the ends of substantial justice; and is independent of any contractual relations between the parties." Memphis & L. R. R. Co. v. Dow, 120 U. S. 287, 301-302 (1887).

⁷ See. e.g., Hampton v. Phipps, 108 U. S. 260, 263 (1883); Lidderdale's Executors v. Robinson's Executor, 12 Wheat. 594 (1827); Duncan, Fox, & Co. v. North and South Wales Bank, 6 App. Cas. 1 (H. L. 1880). See generally Sheldon, Subrogation §11 (1882).

⁸ See cases collected in 50 Am. Jur. Subrogation §49 (1944).

⁹ 208 U. S. at 410.

¹⁰ See, e.g., Martin v. National Sur. Co., 85 F. 2d 135 (C. A. 8th Cir. 1936), aff'd 300 U. S. 588 (1937); In re Scofield Co., 215 F. 45 (C. A. 2d Cir. 1914); National Sur. Co. v. United States, 133 F. Supp. 381 (Ct. Cl.), cert. denied sub nom. First Nat. Bank v. United States , 350 U. S. 902 (1955).

¹¹ See the somewhat different but closely related discussion by which Mr. Justice Cardozo, speaking for this Court, reached a similar result in Martin v. National Sur. Co., 300 U. S. 588, 597-598 (1937).

Our result has also been reached by the Court of Claims in cases substantially like ours. Continental Cas. Co. v. United States, 169 F. Supp. 945 (Ct. Cl. 1959); National Sur. Corp. v. United States, 133 F. Supp. 381 (Ct. Cl.), cert. denied sub nom. First Nat. Bank v. United States , 350 U. S. 902 (1955); Royal Indemn. Co. v. United States , 90 F. Supp. 891 (Ct. Cl. 1950). See generally Speidel, "Stakeholder" Payments Under Federal Construction Contracts: Payment Bond Surety v. Assignee, 47 Va. L. Rev. 640, 646-648 (1961); note, Reconsideration of Subrogative Rights of the Miller Act Payment Bond Surety, 71 Yale L. J. 1274 (1962); comment, 33 Cornell L. Q. 443 (1948).

 

 

[61-1 USTC ¶9358] United States of America , Plaintiff v. Curtis V. Schatz, Charles Schatz, Metropolitan Life Insurance Co., Defendants

U. S. District Court, No. Dist. Ill. , East. Div., No. 59 C 1073, 3/30/61

[1954 Code Sec. 6323]

Liens: State law: Life insurance: Vested interest in beneficiary.--The insured designated two persons as creditor-beneficiaries of life insurance policies which he delivered to them. Subsequently an assessment was made against the insured. A tax lien did not attach to the proceeds of the policies since under Illinois law the creditor-beneficiaries had a vested interest in the policies.

R. Tieken, United States Attorney, and Burton Berkley, Assistant United States Attorney, Chicago, Ill., for plaintiff. J. Robert Geiman of Peterson, Lowry, Rall, Barber & Ross, 135 South LaSalle St., and Francis L. Zimmermann, Room 1540, 10 South LaSalle St., Chicago 3, Ill., for defendants.

Findings of Fact and Conclusions of Law

IGOE, District Judge:

The above cause came on to be heard by the Court sitting without a jury on January 6, 1961. The plaintiff was represented by R. Tieken, United States Attorney for the Northern District of Illinois, and Burton Berkley, Assistant United States Attorney for the Northern District of Illinois. The defendants herein, Curtis V. Schatz and Charles J. Schatz were presented by Francis L. Zimmermann, and the defendant, Metropolitan Life Insurance Co. was represented by Peterson, Lowry, Rall, Barber & Ross, by Mr. J. Robert Geiman. The Court, after considering the evidence, both oral and documentary, adduced upon said trial, makes the following Findings of Fact and Conclusions of Law:

Findings of Fact

1. The instant action was commenced for the collection of income tax and statutory interest assessed against Archie Schatz, pursuant to authority granted by the Attorney General of the United States .

2. This is a civil action stated in the Complaint to be under the Internal Revenue laws of the United States for the foreclosure of alleged liens arising from the withholding tax assessments for the quarterly periods ended March 31, 1952 through December 31, 1952, upon the cash surrender values and surrender dividends of certain life insurance policies, described more specifically below, the commencement of which action was authorized by the Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury, and directed by the Attorney General of the United States.

3. The defendants, Curtis V. Schatz and Charles J. Schatz, reside in DuPage County , whthin this judicial district.

4. The defendant, Metropolitan Life Insurance Co., is a corporation licensed to do business in the State of Illinois and is doing business in the City of Chicago, Illinois, Northern District of Illinois, Eastern Division.

5. On April 14, 1954 and July 7, 1953, the then Commissioner of Internal Revenue made assessments of tax and certain additions against Archie H. Schatz, a resident of DuPage County, Illinois, for the quarterly periods ended March 31, 1952, through December 31, 1952 inclusive, in the total amount of $2,367.07 plus interest thereon according to law and statutory additions for all of said quarterly periods. Said assessment certificates were first received by the then District Director of Internal Revenue at Chicago , Illinois , on July 13, 1953. On March 1, 1954 and October 21, 1954, said District Director caused notices of tax lien covering said assessments to be filed with the Recorder of Deeds, DuPage County , Illinois .

6. On September 1, 1939, Archie H. Schatz insured his life for $500.00 in Metropolitan Life Insurance Co., Policy No. 3 098 655 MS, naming his brother, the defendant, Charles J. Schatz, creditor-beneficiary therein, as security for debt hereinafter described.

7. On February 5, 1940, Archie H. Schatz insured his life for $455.00 in Metropolitan Life Insurance Co., Policy No. 132 335 490, naming his brother, the defendant, Charles J. Schatz, creditor-beneficiary therein, as security for debt hereinafter described.

8. On January 30, 1939, Archie H. Schatz insured his life for $999.00 in Metropolitan Life Insurance Co., Policy No. 130 741 792, naming his wife, Ethel Schatz, beneficiary therein. On December 10, 1947, Archie Schatz changed the beneficiary of this policy to his son, defendant, Curtis V. Schatz, as security for debt hereinafter described.

9. Archie H. Schatz died on February 3, 1955. At that time the cash surrender values and surrender dividends of the above-described policies were:

Policy No. 3 098 655 MS ....         $315.82

Policy No. 132 335 490 .....          232.21

Policy No. 130 741 792 .....          528.39

 

10. Charles J. Schatz operated a sign painting business in DuPage County , Illinois , until his retirement after 1952. His books of accounts receivable show that he extended credit to his brother, Archie H. Schatz, also a DuPage County, Illinois, business man in connection with work done for Archie in the latter's business enterprises, in the following amounts and in the following years, as shown in the books of account of Charles J. Schatz's sign painting business:

Year                  Amount

1934 .....          $ 312.19

1934 .....            165.50

1936 .....             28.40

1939 .....            172.50

1942 .....             15.80

1942 .....            120.80

1945 .....            150.00

1946 .....            165.00

1949 .....           $ 12.50

1950 .....             36.90

1951 .....             22.15

1952 .....            132.10

TOTAL ....         $1,333.84

In addition to this, the defendant, Charles J. Schatz, loaned to his brother, Archie, various large amounts of money in the following years and in the following amounts:

Year                Amount

1936 .....         $500.00

1940 .....          150.00

1944 .....          200.00

TOTAL ....         $850.00

 

11. During the years 1946 through 1953 the defendant Curtis V. Schatz, a Chicago business man residing in DuPage County , loaned to Archie Schatz the following sums of money in the following years:

Year                  Amount

1946 .....          $ 170.00

1947 .....            320.00

1948 .....            110.00

1949 .....            190.00

1951 .....            125.00

1952 .....             75.00

1953 .....            255.00

TOTAL ....         $1,245.00

 

Also, in 1954 Curtis V. Schatz advanced for Archie Schatz as loans and thus paid doctor, nursing and hospital bills incurred by Archie Schatz in the amount of approximately $1,781.34.

12. In respect of the life insurance policies described in Findings 6 and 7 above, the designation by Archie Schatz of Charles J. Schatz as beneficiary therein and the immediate physical delivery, upon issuance, of said policies by Archie Schatz to Charles J. Schatz were both for the express purpose of providing Charles J. Schatz security respecting the existing and future debt of Archie Schatz to Charles J. Schatz; and Charles J. Schatz retained physical possession of said policies continuously after said delivery of same until after Archie Schatz died on February 3, 1955.

13. In respect of the life insurance policy described in Finding 8 above, change in beneficiary therein by Archie Schatz from Archie Schatz's wife to Curtis V. Schatz and the physical delivery, upon such change, of said policy by Archie Schatz to Curtis V. Schatz were both for the express purpose of providing Curtis V. Schatz security respecting the existing and future debt of Archie Schatz to Curtis V. Schatz; and Curtis V. Schatz retained physical possession of said policy continuously after said delivery of same until after Archie Schatz's death on February 3, 1955.

14. After the death of Archie H. Schatz the proceeds of the three insurance policies described above were distributed by the defendant, Metropolitan Insurance Co. to the respective creditor-beneficiaries therein, namely, Curtis V. Schatz and Charles J. Schatz, in the sums of $1,104.24 and $1,117.42, respectively.

15. The debt, secured as above mentioned, of Archie Schatz remaining unpaid to Charles J. Schatz at the time of Archie Schatz's death, was substantially in excess of the said proceeds received by Charles J. Schatz on the said two life insurance policies held as security by Charles J. Schatz.

16. The debt, secured as above mentioned, of Archie Schatz remaining unpaid to Curtis V. Schatz at the time of Archie Schatz's death was substantially in excess of the said proceeds received by Curtis V. Schatz on the said life insurance policy held as security by Curtis V. Schatz.

17. After the death of Archie Schatz, all of said policy proceeds received by Curtis V. Schatz upon the death of Archie Schatz and a substantial portion of the said proceeds received by Charles J. Schatz upon the death of Archie Schatz were used to pay the funeral bill of Archie Schatz and a balance remaining unpaid on the funeral bill of Archie's wife.

18. At the time of the above mentioned first assessment of taxes against Archie Schatz, Charles J. Schatz and Curtis V. Schatz had, and until after the death of Archie Schatz continued to have, specific, perfected vested interests in the above mentioned life insurance policies held by them, respectively, in each case to the extent of an amount in excess of not only the respective cash surrender values but also the face amount of said policies; and no lien for any of the above mentioned unpaid taxes attached at any time to any of said policies or to the cash surrender value or surrender dividends thereof, or to any interest, property or right to property therein whatsoever.

Conclusions of Law

1. Any Finding of Fact which may be concluded as a matter of law is hereby so concluded.

2. The Court has jurisdiction of the subject matter of this action and of the parties hereto.

3. The life insurance policies on the life of Archie Schatz mentioned in Findings 6, 7 and 8 above are Illinois contracts.

4. Whether and to what extent Archie Schatz as insured or Charles J. Schatz and Curtis V. Schatz as creditor-beneficiaries had property, right to property or an interest in said life insurance policies is controlled in this case by Illinois law.

5. Under Illinois law, the designation by Archie Schatz, as insured, of Charles J. Schatz and Curtis V. Schatz as creditor-beneficiaries and the physical delivery by said insured to them of said life insurance policies created and perfected in them, respectively, as such creditor-beneficiaries, a specific, vested interest to secure the debt of said insured to them remaining from time to time unpaid.

6. Said debt of insured to said respective creditor-beneficiaries having at all times since before the first said tax assessment against said insured and until after the death of insured, exceeded not only the cash surrender values of said policies but also the face amounts thereof, there remained to said insured in said policies no property or right to property to or upon which any tax lien at any time could attach; and, accordingly, there exists no lien whatsoever, for said unpaid taxes, in respect of any of said policies or any interest whatsoever in them.

7. Defendants Charles J. Schatz and Curtis V. Schatz are entitled to judgment on the merits, in favor of them and each of them, and against the plaintiff.

8. Plaintiff having failed to introduce any evidence establishing any liability against defendant Metropolitan Life Insurance Company, said defendant is entitled to judgment, on the merits, in favor of it and against the plaintiff.

 

 

[69-1 USTC ¶9252]United States of America, plaintiff v. R. J. C. Limited, a Virginia corporation, defendant

U. S. District Court, East. Dist. Va., Norfolk Div., Civil Action No. 6412, 1/30/69

[Code Sec. 6321]

Lien for taxes: Property subject: Tracing of assets.--A government tax lien which had been perfected against the stock and inventory of a retail jewelry business was not valid some 5 years later to reach the stock and inventory of the new owner who purchased the business without knowledge of the lien. During the 5-year interval, the stock and inventory had turned over some 16 to 20 times so that the delinquent taxpayer did not own or have interest in the property of the present business.

C. V. Spratley, Jr., United States Attorney, Norfolk , Va. , for plaintiff. Breeden, Howard & MacMillan, 1530 Virginia Nat'l Bank Bldg., Norfolk , Va. , for defendant.

Memorandum Opinion

[Facts]

MACKENZIE, District Judge:

Edward Einhorn, trading as: Rogers Jewelry Company, operated a retail jewelry store on Granby Street in downtown Norfolk , Virginia . He became indebted to the United States for $44,218.04 in unpaid Retail Dealers' Excise Taxes and Corporate Income Taxes.

On May 15, 1962 the notice of a federal tax lien in this amount was filed in the Corporation Court of the City of Norfolk, Virginia. The lien was thus effective on October 2, 1962 when Einhorn sold all of the assets of his business, Rogers Jewelry Company, to Discount Stores, Inc.

The United States knew of the transfer from Einhorn to Discount Stores, Inc., but made no effort towards the enforcement of its recorded federal tax lien.

Discount Stores, Inc., of which Einhorn was president, continued the retail jewelry business at the same Granby Street location for two and one-half years until March 2, 1965 when it sold out to R. J. C. Limited, the defendant in the present action. No business connection between the owners of R. J. C. Limited and Einhorn can be shown.

Another two and one-half years later, on October 18, 1967, five years, more or less, from the time of the filing of the original tax lien, the United States began this action against R. J. C. Limited to foreclose on its assets to pay the Einhorn tax lien of $44,218.04.

An earlier motion to dismiss filed by the defendant on the grounds that no cause of action against R. J. C. Limited had been stated in the complaint was denied, the Court ruling that it should hear the United States' evidence as to assets in the hands of R. J. C. Limited that could be shown to have belonged to Einhorn. Discovery depositions have now been taken of all witnesses who might be called. The parties agree that there are no substantial facts in dispute and the complaint is submitted to the Court on cross motions for summary judgment, upon the pleadings, depositions taken and exhibits filed, it being acknowledged that the problem is one of law.

[Rate of Turnover]

It is conceded that in this type of jewelry operation the turnover in stock and inventory is three or four times per year. On this stipulation, the stock and inventory sold by Einhorn to Discount Stores, Inc., in 1962, had turned over some eight to ten times before the sale on March 2, 1965 to R. J. C. Limited. In turn, the stock and inventory sold by Discount Stores, Inc. to R. J. C. Limited in 1965 had turned over some eight to ten times prior to filing of suit in October, 1967. While there are no inventory records as such, the Government acknowledges that there is not now in the hands of R. J. C. Limited any specific items of stock or inventory which can be traced as belonging to Einhorn and in his hands at the time the tax liens were filed in May, 1962.

The United States does claim that the assets sold by Einhorn and burdened at that time by the Government's tax lien were an inventory of retail jewelry, watches, luggage, diamonds, etc. The present stock and inventory of R. J. C. Limited are not the same diamonds, rings, jewelry, watches, luggage, etc., but the Government claims that they may nevertheless follow the inventory from Einhorn to R. J. C. Limited because it represents the reinvestment of the cash realized from sales in like stock and inventory. The United States acknowledges that the experience in the retail jewery trade would show a stock turnover some sixteen to twenty times in the course of five years from lien filing to suit filing.

[No Knowledge of Lien]

The evidence further discloses that a search fo the Court records made by attorneys for R. J. C. Limited at the time of the proposed purchase from Discount Stores, Inc. did not disclose any unpaid government liens against Discount Stores, Inc. They had no knowledge as to when or where Discount Stores, Inc. had purchased the stock and inventory being sold to R. J. C. Limited. The attorneys therefore made no search of the Court records as to Einhorn, having no knowledge of the sale from Einhorn to Discount Stores, Inc.

We agree that at the time of the purchase of Discount Stores, Inc. of the jewelry, stock and inventory of Einhorn, those assets were encumbered by a properly recorded tax lien and were burdened by that lien in the hands of Discount Stores, Inc. after the transfer. If the Government had proceeded for foreclosure at that time, there would be no question that the assets were clearly traceable. We do not know why the Government did not then so proceed, nor why no suit was filed for five years.

In the meantime, the property upon which the lien was perfected has been sold and the sales proceeds reinvested, resold and reinvested many times. It has passed out of the hands of Discount Stores, Inc., which purchased the burdened property, to R. J. C. Limited which had no notice of the lien. Again the Government agrees it had knowledge of this transfer, but chose to do nothing. In the hands of R. J. C. Limited the property has been sold and the sales proceeds reinvested, resold and reinvested many times.

[Different Property]

We are unable to find any case law specifically in point. Nor do we think those cases cited by either party are entirely apropos. The defendant leans heavily on United States v. Salerno [64-1 USTC ¶9130], 222 F. Supp. 664 (D. C. Nev. 1963), and while he may gain some encouragement from the language which would limit the lien to specific property, it becomes apparent that the holding that the right of the insurance company to apply cash surrender value to unpaid premiums came ahead of a tax lien, could just as easily be attributable to the contract provision allowing such application agreed to prior in time to the tax lien.

So, too, reliance on United States v. Bess, [58-2 USTC ¶9595], 357 U. S. 51 (1958), as authority in this case is not justifiable. There the death benefits under a life insurance policy were not assets of the lienee--husband (who subsequently died) but belonged to the beneficiary.

The plaintiff insists that United States v. Webster-Robinson Machinery & Supply Co., Inc. [65-1 USTC ¶9255], (W. D. Wash. 1965) offers it some advantage, but as we read the case, it only stands for the proposition that the original seller of woodworking equipment could not illegally epossess the machinery for the purpose of defeating the lien after it had become the property of the delinquent taxpayer and a tax lien had been properly filed against it.

We find that the Government has failed to establish that the delinquent taxpayer, Einhorn, is the owner of or has any interest in the property in the hands of R. J. C. Limited sought to be foreclosed, nor will the Government claim that the present inventory is traceable back to Einhorn's original stock be allowed.

R. J. C. Limited paid a full and adequate consideration for the stock and inventory of Discount Stores, Inc., and while perhaps not necessary to this decision, it would appear that the theory of tracing assets, advanced by the Government might apply to the full and adequate price so paid, but not to an entirely different stock-in-trade two and one-half years later.

 

 

[59-2 USTC ¶9695]Hoffmann, Donahue, Graff, Schultz & Springer, a co-partnership, Plaintiff v. Miles Burns LaRose, also known as Miles B. LaRose and Miles LaRose, F. J. Eichinger, Wesley Anderson, William Lais, Federal Bureau of Investigation, a governmental agency of the United States of America; United States of America, and Bishop Towing Service, Inc., a Minnesota corporation, Defendants, United States of America, Intervenor, and E. J. Fitzgerald, Clerk of District Court of Ramsey County, Minnesota, Additional Defendant

U. S. District Court, Dist. of Minn., Third Div., No. 3-57 Civil 83, 8/14/59

[1954 Code Sec. 6323]

Federal tax liens: Assignee under bill of sale: Validity of transaction.--An assignment of personal property under a bill of sale which was duly recorded, in the absence of evidence challenging the validity of the transaction, gave the assignee a superior right to the funds derived from the sale of the property as against a District Director of Internal Revenue claiming under a tax lien against the property to the tax-delinquent assignor filed several days after the filing of the bill of sale.

Schultz & Springer by Edward G. Springer, Robert Wm. Patterson, Minnesota Building, St. Paul 1, Minn., for the plaintiff. Briggs, Gilbert, Morton, Kyle, Macartney by B. C. Hart, W-2162 First National Bank Building, St. Paul 1, Minn., for F. J. Eichinger. T. Eugene Thompson , Minnesota Building, St. Paul 1, Minn. , for Miles LaRose. Fallon Kelly, United States Attorney, by Wm. S. Fallon, Assistant United States Attorney, 221 Federal Courts Building, St. Paul, Minn., for the United States.

Findings of Fact, Conclusions of Law, and Order for Judgment

DONOVAN, District Judge:

The above-captioned action was commenced on September 12, 1957, in the District Court of Ramsey County , Second Judicial District, State of Minnesota . Thereafter the action was removed to this Court on October 2, 1957. Thereafter the United States made a motion to intervene and to file a complaint in intervention which motions were heard and granted on February 25, 1958.

Answers to the complaint in intervention and statements of claim were filed by: (1) F. J. Eichinger; (2) Hoffmann, Donahue, Graff, Schultz & Springer, hereinafter referred to as "Hoffmann et al."; and (3) Miles LaRose, also known as Miles B. LaRose and Miles Burns LaRose, hereinafter referred to as Miles LaRose. There were no answers or statements of claim filed by: (1) Wesley Anderson of the Federal Bureau of Investigation, an agency of the United States; (2) William Lais of the Federal Bureau of Investigation, an agency of the United States; (3) Bishop Towing Service, a Minnesota corporation; or (4) E. J. Fitzgerald, Clerk of the District Court of Ramsey County, Minnesota, although they were duly served with process.

Pursuant to a motion by plaintiffs, an order was entered by this Court on April 28, 1958, directing and authorizing the sale of a 1955 Chevrolet, Serial No. B8 5J 144454 and directing that the net proceeds be deposited in the Registry of this Court pending the Court's determination of the above-captioned action. It appears that the proceeds of this sale were delivered to the Clerk of this Court on August 8, 1958 for deposit in the Registry of this Court. It further appears that certain funds and personal property are being held by the Clerk of the District Court of Ramsey County, Minnesota, pending the outcome of this action.

The above-captioned action came on for hearing by the Court on June 22, 1959, Messrs. Schultz & Springer by Edward G. Springer and Robert Wm. Patterson appearing for the plaintiff, Messrs. Briggs, Gilbert, Morton, Kyle and McCartney by B. C. Hart appearing for F. J. Eichinger; T. Eugene Thompson appearing for Miles LaRose and Wm. S. Fallon, Assistant United States Attorney for the District of Minnesota appearing for the United States.

Upon the evidence adduced at the trial, the Court being fully advised in the premises, the Court finds as

Findings of Fact

1. This Court has jurisdiction of the subject matter of this action and of the parties to this action.

2. That the civil action, No. 300058, entitled F. J. Eichinger v. Miles LaRose, commenced in the District Court of Ramsey County, Minnesota, Second Judicial District, was dismissed without prejudice on March 4, 1959.

3. That F. J. Eichinger has no right, title, or interest in or to the said funds on deposit in the Registry of this Court and that the said F. J. Eichinger has no right, title or interest in or to the said funds and personal property being held by the Clerk of the District Court, Ramsey County Minnesota.

4. That on or about August 7, 1957, the firm of Hoffmann et al. entered into a contract and agreement with Miles LaRose for good and valuable considerations wherein and whereby the said firm agreed to represent the said Miles LaRose in certain civil and criminal matters then known to be pending against the said Miles LaRose.

[Bill of Sale]

5. That on or about August 7, 1957, the said Miles LaRose, for good and valuable considerations, executed and delivered to the said firm of Hoffmann et al., a certain Bill of Sale, which said Bill of Sale specifically included certain funds and personal property, title to which is in dispute in this action. That said Bill of Sale was duly filed on August 7, 1957 in the office of the City Clerk, City of Saint Paul , Minnesota , and such filing thereafter constituted constructive notice to all persons dealing or interested in such property.

6. That on or about August 7, 1957, the said Miles LaRose, for good and valuable considerations, executed and delivered to the said firm of Hoffmann et al., a certain Assignment, which said assignment specifically included certain funds and personal property, title to which is in dispute in this action. That said assignment was duly filed on August 7, 1957, in the office of the City Clerk, City of St. Paul , St. Paul , Minnesota , and such filing thereafter constituted constructive notice to all persons dealing or interested in such property.

7. That on or about August 7, 1957, the said Miles LaRose, for good and valuable considerations, executed and delivered to the said firm of Hoffmann et al., a bill of sale to that certain 1955 Chevrolet automobile, Serial No. B8 5J 144454, title to which is in dispute in this action. That pursuant to the order of this Court, dated April 28, 1958, the said Chevrolet automobile was sold and as provided in said order, the net proceeds from the sale of said Chevrolet automobile were deposited in the Registry of this Court, and the title to such funds are in dispute in this action.

8. That the District Director of Internal Revenue for the District of Minnesota issued notices and demands for back income taxes against Miles LaRose, taxpayer, for the taxable year 1956 and for the period from January 1, 1957, to August 7, 1957, with penalties and interest duly assessed in the total amount of $21,410.99 by two assessments made by the District Director of Internal Revenue for the District of Minnesota on August 15, 1957. The assessment for the year 1956 was in the amount of $17,008.42 and the assessment for January 1, 1957 to August 7, 1957 was in the amount of $4,402.57.

[Notices of Tax Liens]

9. Notices of tax liens with respect thereto were filed on September 9, 1957, with the Clerk, United States District Court for the District of Minnesota, at Saint Paul, Minnesota, and also with the Register of Deeds for Ramsey County, Minnesota, and there recorded in book 84 of Liens, page 131.

10. That after August 7, 1957, the said Miles LaRose had no right, title or interest in the funds and personal property transferred by the said Bill of Sale and said Assignment both dated August 7, 1957 and that after August 7, 1957 the said Miles LaRose had no right, title or interest in the funds representing the net proceeds from the sale of said Chevrolet automobile.

And the Court finds as

Conclusions of Law

1. That the Court has jurisdiction of the subject matter of the action and of the parties to the action.

2. That after August 7, 1957 the said Miles LaRose had no right, title or interest in the said funds and personal property specified in said Bill of Sale and said Assignment both dated August 7, 1957, and that after August 7, 1957 the said Miles LaRose had no right, title or interest in the said Chevrolet automobile, and that the said Miles LaRose at no time had any right, title or interest in the funds representing the net proceeds of the sale of said Chevrolet automobile.

3. That the said F. J. Eichinger has no right, title, or interest in or to the said funds in the Registry of this Court and that the said F. J. Eichinger has no right, title or interest in or to the said funds and personal property being held by the Clerk of the District Court, Ramsey County, Minnesota.

4. That on August 7, 1957, the said firm of Hoffmann et al. were the owners of and were entitled to the possession of the funds and personal property specified in said Bill of Sale and Assignment; that on August 7, 1957, the said firm of Hoffmann et al. were the owners of and were entitled to the possession of said Chevrolet automobile and that the said firm of Hoffmann et al. were the owners of the net proceeds from the sale of said Chevrolet automobile.

5. That the United States did not by the assessments made on August 15, 1957, nor by the recording of said tax liens on September 9, 1957, acquire any right, title or interest in or to the said property and funds specified in said Bill of Sale and Assignment; that the United States by said assessment or by filing of said tax lien did not acquire any right, title or interest in the Chevrolet automobile or in the net proceeds representing the sale of said automobile.

6. That the said firm of Hoffmann et al. is entitled to, free and clear of any and all claims of anyone else, the personal property and funds specified in said Bill of Sale of August 7, 1957, which said property and funds are now in the possession of the Clerk of District Court of Ramsey County, Minnesota.

7. That the said firm of Hoffmann et al. is entitled to and hereby is awarded, free and clear of any and all claims the fund of Six Hundred and Fifty ($650.00) Dollars in the Registry of this Court representing the net proceeds from the sale of said Chevrolet automobile, and upon the filing of waivers of appeal or expiration of time therefor the Clerk of this Court is hereby authorized and directed to issue a check to Hoffmann, Donahue, Graff, Schultz & Springer out of the Registry of the Court in that amount representing the net proceeds from the sale of said Chevrolet automobile as heretofore deposited and to mail said check to Messrs. Schultz & Springer, attorneys at law, 1220 Minnesota Building, Saint Paul 1, Minnesota.

LET JUDGMENT BE ENTERED ACCORDINGLY

The memorandum attached hereto is made a part of this order.

Exceptions are allowed.

Memorandum

Certain items of money and property were taken from taxpayer Miles LaRose when he was arrested on August 5, 1957. Later these items were placed in the custody of the Ramsey County District Court and this Court. This action which was removed from state court was brought to determine who is entitled to those items.

The government's claim is based upon alleged liens on taxpayer's property arising from the assessments made by the District Director of Internal Revenue on August 15, 1957, under 28 U. S. C. A. §6321, Internal Revenue Code of 1954. This claim must be denied because on the assessment date the taxpayer had no interest in the disputed money and property. The documents and testimony establish that all of taxpayer's rights to the items were transferred to Plaintiff Hoffmann, Donahue, Graff, Schultz and Springer, a co-partnership, on August 7, 1957. The bona fides of the transaction has not been challenged.

The government's contention that only a security interest in the property was given to the co-partnership is not supported by the evidence. The instant case is altogether different from a situation where an assignment is made merely for security purposes.

Since taxpayer had no right to this particular property on the critical date, no rights therein can accrue to the government by way of its liens although they were perfected. The co-partnership, which is the only other serious contestant for the items, must therefore prevail.

 

 

[58-2 USTC ¶9683] United States of America , Plaintiff v. J. R. Mattingly, P. R. Warsaw, E. Topping, Merchants Finance Corp., and Arthur G. Thomas, Defendants

U. S. District Court, So. Dist. Fla., Miami Div., No. 6495-M-Civil, 6/9/58

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien for taxes: Another's property: Liquor license.--United States tax liens were not valid against a Florida liquior license once owned by the taxpayer where the liens were filed on March 23, 1954 but the license was sold to another party on January 3, 1951.

James L. Guilmartin, United States Attorney, Post Office Building, Miami, Fla., for plaintiff. Morehead, Forrest, Gotthardt, Greenfield & Greenberg, 228 North East 2nd Avenue, Miami, Fla., for P. R. Warsaw, Merchants Finance Corp., Arthur G. Thomas.

Findings of Fact, Conclusions of Law and Final Judgment

WYCHE, District Judge:

This cause coming on for trial to be heard before me upon stipulation of United States of America, P. R. Warsaw, Merchants Finance Corp. and Arthur G. Thomas, and the Court having heard argument of counsel for the above parties, and considering the memoranda of law submitted and the matter being submitted to the Court for its decision, the Court therefore makes its following:

Findings of Fact

1. This action is authorized by the Commissioner of Internal Revenue and commenced at the direction of the Attorney General of the United States .

2. The individual defendants reside within the jurisdiction of this Court, and the corporate defendant exists under the laws of the State of Florida and has its principal place of business within the jurisdiction of this Court.

3. The said Commissioner assessed deficiencies against defendant J. R. Mattingly with respect to excise and withheld income taxes on the dates, in the amounts, and for the taxable periods set out as follows:

                                                                     Assessment          Notice of

Date Assessed               Amount         Taxable Period         List Received         Lien Filed

3-30-53 ..........         $620.31        4th qtr. 1952             4-1-53              3-23-54

6-1-53 ...........           63.08          Feb. 1953               6-3-53              3-23-54

6-1-53 ...........           62.56          Mar. 1953                    6-3-53            3-23-54

6-15-53 ..........          269.04        1st qtr. 1953             6-17-53                3-23-54

8-31-53 ..........          199.15        2nd qtr. 1953             9-3-53              3-23-54

9-25-53 ..........          164.64        Apr.-June 1953            9-25-53             3-23-54

 

4. The lists covering said assessments were received by the District Director of Internal Revenue in Jacksonville on the dates set out above.

5. Notices of said assessments were given to defendant J. R. Mattingly and demands were made on him for payment thereof. Notices of said liens were duly filed on March 23, 1954, with the Clerk of the Circuit Court for Monroe County, Florida, within which county defendant Mattingly had operated a cabaret known as the Habana Madrid Club, 431 Front Street, Key West.

6. That on June 2, 1954, a levy was served on defendant Phillip R. Warsaw, individually, and as president of defendant Merchants Finance Corporation for the unpaid taxes herein suit assessed against defendant Mattingly, T-A Habana Madrid and/or Habana Madrid Club, Front and Duval Streets, Key West , Florida , in the amount of $938.98. (Exhibit I [not reproduced herein]). Attached to said levy were copies of warrants for distraint which had been previously served on defendant J. R. Mattingly (Exhibit J [not reproduced herein]), and a copy of Notice of Federal Tax Liens under Internal Revenue Laws, Treasury Department Form 668, pertaining to the taxes here in issue assessed against defendant J. R. Mattingly in the amount of $944.85 (Exhibit K [not reproduced herein]).

7. Partial payment was made by said defendant Mattingly on the deficiency assessed for the fourth quarter of 1952, so that the total balance due the United States under its recorded liens amounts to $944.85, together with interest thereon as provided by law.

8. That on September 10, 1948, the defendant Merchants Finance Corporation and defendant J. R. Mattingly entered into a lease agreement, a copy of which is attached hereto and made a part hereof as though set out in haec verba. (Exhibit A [not reproduced herein]).

9. That on May 11, 1949, a supplemental lease agreement was entered into between Merchants Finance Corporation and James R. Mattingly, a copy of which is attached hereto and made a part hereof as though set out in haec verba. (Exhibit B [not reproduced herein]).

10. That on January 3, 1951, an agreement was entered into between Merchants Finance Corporation and James R. Mattingly, a copy of which is attached hereto and made a part hereof as though set out in haec verba (Exhibit C [not reproduced herein]).

11. That on April 30, 1954, the defendant Merchants Finance Corporation commenced landlord's distress proceedings against defendant J. R. Mattingly.

12. That attached hereto and made a part hereof are copies of the distress warrant, distress affidavit for rent, and subsequent default and final judgment (Exhibits D, E, F [not reproduced herein]).

13. That on January 20, 1949, license No. 211 to sell intoxicating beverages at retail at the Habana Madrid Club, 431 Front Street , Key West , Florida , was transferred to defendant J. R. Mattingly by the State of Florida Beverage Department.

14. That on March 2, 1954, defendant Philip R. Warsaw filed an application for the transfer of said license No. 211 from defendant J. R. Mattingly. Said transfer was approved by the Director of The Florida Beverage Department on April 26, 1954 (Exhibit G [not reproduced herein]) and actually transferred to defendant Philip R. Warsaw on May 3, 1954.

15. That on August 12, 1954, defendant Arthur G. Thomas filed an application for the transfer of said license No. 211 from defendant Philip R. Warsaw. Said transfer was approved by the Director of the Florida Beverage Department on September 7, 1954 (Exhibit H [not reproduced herein]). Defendant Arthur G. Thomas is the present owner of said license No. 211. No other applications for transfer of said license No. 211 were filed or approved by the Florida Beverage Department.

16. That on March 15, 1954, the City Commission of Key West, Florida, approved the transfer of a city liquor license from defendant J. R. Mattingly to defendant Philip R. Warsaw pertaining to the Habana Madrid Club, 431 Front Street, Key West Florida. The application for the above transfer of the said Key West city liquor license was filed on March 2, 1954.

[License Transferred to Another]

17. That the defendant, J. R. Mattingly at the time that the assessment list was received by the District Director of Internal Revenue Service and at the time that the lien based upon the said assessments were filed, was not the owner of the State Liquor License No. 211.

18. That in 1949, the defendant, J. R. Mattingly pledged the said State Beverage license to Merchants Finance Corp. for valuable consideration.

19. On January 3, 1951, Merchants Finance Corp. purchased the said State Beverage license from J. R. Mattingly.

Conclusions of Law

1. That the lien of the United States of America is not enforceable against the Florida State Liquor license.

2. That the tax lien of the United States of America did not constitute a valid subsisting lien against the Florida State Liquor license No. 211 and therefore this action insofar as it relates to the enforcement of any liens upon the said liquor license fails. ¹

Final Judgment

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that judgment be and it is hereby entered in favor of the defendants, P. R. Warsaw, Merchants Finance Corp. and Arthur G. Thomas and against the United States of America , and the United States of America take nothing by this action against the above named defendants, each party to bear his own costs.

¹ See, Findings of Fact and Conclusions of Law in United States of America v. Harold A. Keats, U. S. District Court, So. Dist. Fla. , Miami Div. No. 7294-M-Civil, dated 2/28/58 [58-1 USTC ¶9472].

 

 

[57-1 USTC ¶9407] United States of America , Plaintiff v. Harry C. Patterson & Arthur M. O. Wong, Defendants

U. S. District Court, Dist. of Hawaii, Civ. 1443, 12/14/56

[1954 Code Sec. 6321--similar to 1939 Code Sec. 3670]

Deficiency: Collection: Lien for taxes: Liability of shareholder for corporate taxes.--The Government sought to collect corporate taxes from a stockholder on the ground that he had not made full payment for a stock subscription. The stockholder was held not liable, since the evidence failed to prove that he actually received or subscribed for 675 shares, as alleged, through a dummy purchaser. The stockholder was found to have received only $9,000 worth of stock, and this in exchange for equipment which he had contributed to the corporation. No records were produced showing any stock subscription, and no contract of stock purchases between the corporation and the stockholder could be found or even implied. Further, he was never a director or an incorporator of the corporation, which would, under a Hawaii law, have made him liable in some cases for corporate debts.

United States Attorney, Edgar D. Crumpacker, Assistant United States Attorney, District of Hawaii, Honolulu , T. H., for plaintiff. John T. Ushijima, Hilo , Hawaii , T. H., for defendant, Arthur M. O. Wong.

Oral Decision

MCLAUGHLIN, District Judge:

This is a case in which the United States seeks to recover taxes due by a corporation from one of its stockholders in that it is agreed that if the stockholder has the liability to the corporation, it follows that the same is an asset upon with [which] a satisfactory lien, which may be reduced to satisfy the corporation's tax liability to the United States, may be--

[Failure to Pay for Subscribed Stock Alleged]

The suit was instituted against two of the stockholders on the theory that each of them owed the corporation a sizable amount of money by reason of each having subscribed to 675 shares of stock but each having only paid in for said stock interest $9,000.

The defendant Patterson did not contest the issue. Default judgment has been entered against him. He testified here for the government in the government's case against the other defendant Wong. The facts I find to be as follows:

[Stockholder Reluctant to Join]

Wong and Patterson and Headman had been engaged in business ventures previously and Patterson was a co-owner with Wong of certain equipment located in Hilo or on the big island of Hawaii during 1952. Patterson was interested in going after an opportunity that was available with respect to acquiring and demolishing and disposing of certain quonset huts owned by the Navy in Kaneohe . He apparently endeavored to interest Wong in going into this business prospect with him, Wong resisting on the ground that it was too large an undertaking for either of them since additional capital, more than they had, was needed. There came a time when Patterson reported to Wong upon a trip to Hilo from Honolulu that Headman, a lawyer, as well as a business associate, had formed a corporation for the purpose of making a bid upon this Kaneohe demolition quonset hut project, and urged if Wong was prudent he would get into the corporation. Apparently there were may [many] discussions, Wong still resisting the invitation to join in this corporate venture. But at least he agreed to consider renting his half interest in the equipment to the corporation for use in connection with this demolition project if the corporation was the successful bidder. The corporation did bid on the project and the Navy accepted its bid.

[Equipment Contributed]

At that time Patterson advised that about the only way he would be able through this corporate device to make any money was if Wong would come along and join the corporation by contributing his interest in the equipment, receiving in return for his share an interest in the corporation, as to rent the equipment to the corporation would be, he said, too expensive. Wong agreed and bills of sale relating to the equipment were drawn up and executed in favor of the corporation by both Patterson and Wong, and thereafter the corporation used this equipment asset as collateral for a note upon which it borrowed money to proceed with the project.

As might be expected from the way this corporation, as will later be described, was formed and operated, out of the lawyer's hip pocket, and with some inaccurate, to say the least, representations made to the Territory, the venture was not a success. For some reason, incidentally, it appears also that at the time of the corporation's formation the incorporators of the corporation and two other people, not incorporators, entered into a joint venture with the corporation to share the profits and losses of the venture which the corporation was originally created exclusively to perform.

[Corporation Not Profitable]

The evidence shows that the corporation lost not only what the stockholders originally invested but in addition some eight thousand dollars. The corporation was allegedly incorporated on the basis of issuing 2,000 shares of common stock at a par value of a hundred dollars a share, reflecting a capitalization of $200,000. The original incorporators, according to the document filed with the Territory at the time the charter was granted, were one Max Gomes, William Mossman, Nani Aluli and G. W. Headman, as well as the person by the name of William Mossman. Significantly, neither the name of Patterson nor Wong is mentioned as being one of the original incorporators. Patterson testified that he believed that he was one of the original incorporators in that the lawyer advised him to come into the corporate venture through what is described as a dummy, in this instance a young man whom he was taking care of by the name of Maxim Gomes. Patterson believes that through this individual for whom he later got a power of attorney, he is obligated to pay for 675 shares of this corporation's stock.

[No Stock Contract]

Wong is of the opinion that Mr. Patterson is mistaken. In any event, Wong testified--and I am satisfied that he has a better recollection of details than has Mr. Patterson--that he undertook only to go into this corporation to the extent of the value of the equipment which he was contributing, to wit, $9,000, and in no way, expressly or impliedly, subscribed to any more stock than the $9,000 worth.

This person called the Consolidated Development Corporation, Limited, is essentially a corporation in name rather than fact. And, as intimated, it may have perpetrated fraud or misrepresentation upon the Territorial Treasurer by some of its representations. But be that as it may, at this time, in any event, there are no corporate records made available and submitted as proof in this case worthy of the name save and except certain documents required to be filed with the Territorial Treasurer. There is absolutely no document indicating any stock subscriptions signed by Wong. As above mentioned there is no evidence of an affirmative nature that he at any time was one of the incorporators. Indeed, the evidence is exactly to the contrary.

So certainly the government in this state of affairs is not entitled to a finding that on any express contract Wong now owes this corporation anything upon an affirmative stock subscription. Of course, as to any 675 shares of said contract reflecting a balance due beyond the point of $9,000, as indicated there is no such contract shown by this evidence.

[ Hawaii Law]

However, the government says that in any event there is liability here upon Wong's part under the Territorial statute and on the applicable law in that either the stock subscription contract of 675 shares can be implied, either factually or in point of law. I certainly find no basis for implying any such contract in fact and, as indicated, I am finding that Mr. Wong's testimony of this whole transaction is reliable and better than that predicated as it is upon an assumption or assumptions made by Mr. Patterson as to what the facts were.

As to statutory liability, the government endeavors to spell out a theory whereby Wong should nevertheless be held in point of law to this liability because it is said Mossman was really Wong's dummy like Gomes was Patterson's dummy, and that if misrepresentations in the incorporating papers and documents were made to the Territorial Treasurer, at least the corporation engaged in business as of the date it made the Navy bid and at or about that time Wong came into the corporation and knew or should have known of the situation to the point where he can be impliedly held to be one of the original incorporators. Parenthetically, Wong was never a director of the corporation but he was upon occasion advised that he had been elected president, but he never had occasion to function as president and describes himself as being a dummy president, if in fact a president in any capacity he was. But in any event, he was never a director so in any event if there was any statutory liability it was on the theory that in this substance he was one of the original incorporators.

The Territorial Statute on this subject reads insofar as here pertinent, Section 8310, Revised Laws of Hawaii, 1945:

"In case of any violation of this section by any corporation, the incorporators and the directors thereof at the time the corporation commences to engage in business shall in their individual and private capacities be jointly and severally liable to the corporation and the stockholders and creditors thereof, in the event of its bankruptcy or insolvency, or in the event of its dissolution, for any loss suffered by the corporation or its stockholders or creditors by reason of such violation."

[U. S. Not Helped by Local Law]

Well, from the facts made to appear here, I don't believe this statute fits or benefits the United States . Indeed, it hasn't been made to affirmatively appear that there was any corporate violation of this particular section or any bankruptcy or insolvency or dissolution or even if there was that there was any loss suffered by the United States by reason of this violation. But more basically, I cannot bring myself to conclude from the facts made to appear that as a matter of law Wong must be held to have been one of the original incorporators. Indeed, the facts are directly to the contrary. It may have been that someone would have liked to have had him as an incorporator, but he never directly or indirectly put himself in the position of being the recipient of any such liability either in fact or in point of law. The evidence shows that he knows nothing about the incorporation of this organization. About all he knows about Mossman is that it is a name. But he asked on two occasions of Headman to produce his stock which, incidentally, was never issued; he was told that he would have to get an assignment from Mossman before it could be issued and that it would be done, but it never was done.

Certainly to hold any person to liability under this statute, something stronger than the evidence that has here been presented must be tendered as proof, for certainly people cannot be made to respond to liability such as this by third persons putting their names down as incorporators without their permission or by using dummies for them without their permission, or by having such people in their minds as figments of their imagination that they are incorporators.

So all in all, it is my conclusion that on any one of the theories advanced by the government, there has been a failure of proof here, and judgment will be entered for the defendant.

The foregoing may stand as Findings of Fact and Conclusions of Law.

 

 

[66-1 USTC ¶9451] United States of America , Plaintiff v. Home Savings and Loan Association, Defendant

U. S. District Court, Dist. N. Mex., No. 6203 Civil, 4/5/66

[1954 Code Sec. 6321]

Levy and distraint: Lien for taxes: Bank's liability under levy.--A taxpayer's savings account, which he assigned to a savings and loan association as security for a loan, was not subject to a lien of the United States. The taxpayer failed to meet the conditions of the assignment which would revest control of the account in him, and it was shown that the taxpayer owed more than the amount of the assignment.

John Quinn, United States Attorney, Ruth C. Streeter, Assistant United States Attorney, Post Office Box 607, Albuquerque, N. Mex., for plaintiff. Jack A. Smith, 715 Simms Bldg., Albuquerque, N. Mex., for defendant.

Opinion and Findings

PAYNE, District Judge:

This cause came on to be heard before the Court sitting without a jury, at the conclusion of which the Court decided the case in favor of the defendant and against the plaintiff, and dictated certain findings into the record. All of said findings are adopted herewith. However, the plaintiff has filed its requested findings of fact and conclusions of law and the Court feels that it probably should make written findings and file a written opinion so that the written record will show the position of the Court.

In this case Wilbur Lewis and Thelma J. Lewis, his wife, borrowed the sum of $22,000.00 from the defendant. On January 14, 1963, as a part of closing the loan, Mr. and Mrs. Lewis executed an assignment of a savings account as additional security for the loan. Thereafter, to-wit, on the 3rd day of October 1963, the United States , through the Internal Revenue Service, assessed taxes against Mr. and Mrs. Lewis in the sum of $5,029.49. A notice of tax lien was filed with the County Clerk of this county some four months later. On May 15, 1964, a notice of levy was given to the defendant, and on January 4, 1965, a final demand was made on the defendant to pay over the savings account in the sum of $1,100.00 plus accrued interest, to the United States . The United States takes the position that the assignment had expired and that the defendant was in possession of property belonging to the taxpayers, and that it was subject to the levy for taxes.

The assignment provided--

"that if the borrower shall faithfully discharge the agreements and covenants in the note to the Association and the Mortgage securing the same until said loan is reduced to the principal sum of $20,900.00, or until 12 months from the date of this agreement whichever shall occur first,"

then the savings account was to belong to Mr. and Mrs. Lewis. The parties have not been able to agree concerning the meaning of this clause.

The Court construes this clause to mean that if the borrowers, that is, Mr. and Mrs. Lewis, would live up to the agreement which they had made with the defendant, until their loan was reduced to $20,900.00, or for 12 months, whichever occurred first, then the assignment was to have no further force or effect. Mr. and Mrs. Lewis did not make their payments to the defendant during the twelve-month period and did not reduce the loan to $20,900.00. In other words, they did not faithfully discharge the agreements and convenants of the note and mortgage during said twelve-month period, nor did they reduce the note to $20,900.00. Accordingly, the Court finds that they did not do the things necessary in order to vest control of the savings account in them. Therefore, the claim and lien of the defendant was superior to the lien of the United States .

The passbook for this account was delivered by the taxpayers to the defendant at the time of closing the agreement. It was introduced into evidence by the defendant, showing that the taxpayers had divested themselves of any control of the account.

Accordingly, the Court is of the opinion that the defendant should prevail and that the United States should not have judgment against the defendant for the amount of this account, or at all.

The note and mortgage were introduced into evidence to show that the taxpayers owed the defendant much more than the amount of this assignment and, therefore, the claim of the defendant was prior and superior to the claim of the Government.

Judgment should be entered accordingly. This opinion shall constitute the findings and conclusions of the Court.

[48-1 USTC ¶9203]United States of America, Appellant, v. Barndollar & Crosbie, Inc., a corporation, Federal National Bank of Shawnee, Oklahoma, and J. F. Buck, Appellees

(CA-10), In the United States Circuit Court of Appeals, Tenth Circuit, No. 3513, 166 F2d 793, March 1, 1948

Appeal from the District Court of the United States for the Eastern District of Oklahoma.

(1) Lien for taxes: Funds of taxpayer in bank's custody.--The facts shown by the district court record of two consolidated cases, involving respectively the government's claim for delinquent taxes against taxpayer's funds held by the bank and claims of rival creditors including the bank against taxpayer's property, were held insufficient to support a finding that there was in the bank's custody an amount equal to the judgment awarded the government, and no more, belonging to the taxpayer and subject to the lien for taxes.

(2) Review by Circuit Court of Appeals: Failure to except to District Court judgment.--Under the facts the question of whether the lower court judgment should have been for the full amount of the delinquent taxes, rather than a lesser amount, was preserved for review on appeal, despite the government's failure to except thereto. Vacating and remanding the decision of the District Court, reported at 47-1 USTC ¶9129.

Harry Marselli (Theron Lamar Caudle, Assistant Attorney General, Helen R. Carloss, A. F. Prescott, Newton K. Fox, Special Assistants to the Attorney General, Cleon A. Summers, United States Attorney, and J. W. Crawford, Assistant United States Attorney, were with him on the brief) for Appellant. John L. Goode (Mark Goode was with him on the brief) for Appellees.

Before BRATTON, HUXMAN and MURRAH, Circuit Judges.

[Pleadings and Trial Court Findings]

BRATTON, Circuit Judge:

The United States instituted this action against Barndollar & Crosbie, Inc., a corporation, hereinafter referred to as the taxpayer, Federal National Bank of Shawnee , Oklahoma , hereinafter referred to as the bank, and J. F. Buck, president of the bank. The claim pleaded was that the taxpayer owed insurance contribution taxes and unemployment taxes, together with penalty and interest thereon, in the aggregate amount of $3,217.20; that the bank and Buck received and had in their custody funds and other property belonging to the taxpayer; that notice of the levy was filed of record, as required by law; that warrants of distraint were served upon the bank and Buck, as required by law; that demand for the payment of such taxes had been made upon the taxpayer, the bank, and Buck; that each and all of them had failed and refused to make payment; and that the funds belonging to the taxpayer in the hands of the bank and Buck were subject to a lien for the taxes, penalty and interest. By answer, the bank pleaded that it held the note of the taxpayer on which there was then due $10,399.84, together with accrued interest; that the note was secured by a mortgage covering certain property of the taxpayer; and that the mortgage was in process of being foreclosed. By separate answer, Buck admitted that he had in his possession $15,000 belonging to the taxpayer but he pleaded that it was being held to indemnify himself and to be applied in payment of the note due the bank. The taxpayer responded to the answers of the bank and Buck, but it did not file any answer to the complaint or otherwise join issue upon the existence or amount of the delinquent taxes. The Court found that the taxes had been duly assessed; that proper demands for payment had been made; that warrants of distraint had been issued and served; that proper notices of tax liens had been filed; and that the bank and Buck had in their possession money in the amount of $1,251.59 belonging to the taxpayer which was subject to the lien for the taxes. Judgment was entered commanding the bank and Buck to pay to the United States $1,251.59 out of the funds belonging to the taxpayer, with the further provision that on failure immediately to make such payment the United States have and recover the amount from the bank and Buck. The United States appealed.

[Pertinent Statutes]

Section 1400, 1401, and 1410, of the Internal Revenue Code, 26 U. S. C. A. §§ 1400, 1401, 1410, imposes insurance contribution taxes, and section 1600 lays unemployment taxes. Section 3670, 26 U. S. C. A. §3670, provides in effect that where a person fails or refuses to pay taxes due the United States after demand, such taxes, penalty, and interest shall be a lien upon all property and rights to property belonging to such person; section 3671, 26 U. S. C. A. §3671, provides that unless another date is specifically fixed by law, the lien shall arise at the time the assessment list is received by the collector and shall continue until the liability is satisfied or becomes unenforceable by lapse of time; section 3672, 26 U. S. C. A. §3672, provides that the lien shall not be valid as against a mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the collector in the manner therein specified; and section 3678, 26 U. S. C. A. §3678, authorizes a civil action in the United States Court to enforce the lien for the taxes upon any property and rights to property of the delinquent taxpayer, and provides that all persons having liens upon or claiming any interest in such property shall be made parties. Considered together, these statutes are broad in their sweep, and they indicate a studied legislative purpose to secure the collection of taxes. Glass City Bank v. United States, 326 U. S. 265 [45-2 USTC ¶9449]; Cannon v. Nicholas, 80 Fed. (2d) 934 [35-2 USTC ¶9672]; Citizens State Bank of Barstow, Tex. v. Vidal, 114 Fed. (2d) 380 [40-2 USTC ¶9603]. The lien created by section 3670 covers all property or rights in property of the taxpayer. And, subject to the provisions of section 3672, it may be enforced as against a mortgagee, pledgee, purchaser, or judgment creditor, of the taxpayer. Citizens State Bank of Barstow , Tex. v. Vidal, supra.

[Deficiency in Record to Support Trial Court Judgment]

The parties argue the question whether judgment should have been entered against the bank and Buck for the full amount of the taxes, together with penalty and interest, aggregating $3,217.20. Two cases were pending in the Court. One was numbered 1039. The taxpayer, the bank, Buck, the State of Oklahoma , and others were parties; and it seemingly presented for determination rival claims to property of the taxpayer. The United States was not a party. The other case was this one instituted by the United States to recover unpaid delinquent taxes. It was numbered 1622. The two cases were consolidated for trial. The attorney representing the government stated early in the trial proceedings that it was the contention of the government that $15,000 held by the bank and Buck in an indemnity fund was subject to the lien for the taxes; and that the contention was reflected by the pleadings. The Court replied that the question relating to the fund being subject to the lien for the taxes would be determined after disposition had been made of the issue whether the bank and Buck took over and operated the business of the taxpayer, and if so whether the taxpayer had suffered resulting damages. Soon after these statements were made, the auditor previously appointed by the Court made an oral report in Open Court . The substance of the report was that Buck held in his possession $15,000 belonging to the taxpayer, and that the taxpayer was indebted to the bank in the sum of $10,399.84, plus accrued interest. Oral and documentary evidence was introduced, but it related solely to the issues between the taxpayer and the bank and Buck. It did not have any relation whatever to the funds of the taxpayer in the hands of the bank and Buck. A stipulation is in the record, but it does not bear any title or number. It provides that the bank pay to the taxpayer $10,785.60; that out of such money, the taxpayer pay the State of Oklahoma $1,000, General Steel Products Corporation $2,250, and Jackson Materials Company, Inc., and W. C. Jackson individually $4,000. It recites that the liability of the taxpayer to the United States "upon its claim in this lawsuit, has been determined by the Court by judgment on the evidence in accordance with the findings of fact and conclusions of law to be entered herein"; and it provides that the taxpayer shall pay the amount of the judgment out of the money received from the bank. It further provides that after making payment of $10,785.60 any funds retained by the bank or Buck belonging to the taxpayer shall be the property of the bank. And finally, it provides that after making the required disbursements out of the $10,785.60 received from the bank, any balance in the hands of the taxpayer shall be its property "free and clear of any claim . . . of the parties to this action, . . ." The stipulation was signed by the attorneys for the taxpayer, the bank, Buck, the State Insurance Fund, General Steel Products Corporation, Jackson Materials, Inc., and Jackson, individually. It was not signed by the United States . There are findings of fact and conclusions of law in the record bearing at the top thereof the numbers of both cases, 1039 and 1622. They recite that the parties to the consolidated action, except the United States, entered into a stipulation to settle the cause; that cause No. 1622 had been reduced to judgment, upon a trial of the issues; that the stipulation was dictated by the parties in Open Court and later signed; and that the stipulation was attached to the findings and made a part of them. A judgment appearing in the record also bears at the top thereof the numbers of both cases, 1039 and 1622. It provides that in accordance with the findings of fact, the taxpayer recover from the bank $10,785.60; that the note on which the bank sued be cancelled and surrendered; and that out of the money recovered from the bank, the taxpayer pay the judgment of $1,251.59 rendered in favor of the United States in cause originally numbered 1622, pay the State Insurance Fund $1,000, pay General Steel Products Corporation $2,250, and pay Jackson Materials Company, Inc., $4,000. It further provides that the judgment shall be a "full, complete, and final settlement of all conflicting claims between the parties to this litigation, except the United States . . . ." And it further provides that after paying $10,785.60 to the taxpayer, any balance in the hands of the bank or Buck out of $15,000 held for the benefit of the taxpayer shall belong to the bank. The stipulation, the findings of fact bearing at the top thereof the numbers of both cases, the judgment bearing at the top thereof the numbers of both cases, the findings of fact and conclusions of law in this separate case brought by the United States for the recovery of taxes, and the judgment in this separate case, were each and all filed in the Court on the same day. While the record is freighted with lack of clarity, considered as a whole and without further explanation, it indicates that the bank and Buck had in their possession funds belonging to the taxpayer and subject to the lien of the government sufficient in amount to pay in full the taxes, penalty, and interest. There is nothing in the record to show that the bank or Buck had in its or his possession $1,251.59, but no more, belonging to the taxpayer and subject to the lien. And omitting the State of Oklahoma , there was no showing as to whether any of the other parties had a bona fide lien on the funds of the taxpayer in the hands of the bank and Buck.

It is fairly apparent from the record that the claim of the State of Oklahoma was for the benefit of the insurance fund of the state; and, if so, the lien of the United States upon the funds of the taxpayer in the hands of the bank and Buck was prior to that of the state. Illinois v. United States , 328 U. S. 8; Illinois v. Campbell, 329 U. S. 362.

It is impossible to find in the record any sustainable basis for the finding that the bank and Buck had in their possession $1,251.59--and no more--belonging to the taxpayer which was subject to the lien for the taxes; and likewise, it is impossible to find any basis for the judgment in favor of the United States for that amount, but no more.

[Failure of United States to Except to Trial Court Judgment]

Endeavoring to avoid a reversal of the judgment, the bank and Buck advance the judgment that since the United States did not except to the findings of fact and conclusions of law, or the judgment, no question was preserved for review on appeal. Rule of Civil Procedure 46, 28 U. S. C. A. following §723c, renders unnecessary the taking of formal exceptions to rulings or orders of the Court. Still in order to preserve a question for review on appeal, a litigant is required to make known to the Court the action he desires taken, or his objection to the action taken and his ground or grounds therefor. Massachusetts Bonding & Insurance Co. v. Preferred Automobile Insurance Co., 110 Fed. (2d) 764; Brybrough v. Ware, 111 Fed. (2d) 548. But here the complaint, and the statement of counsel made early in the trial, left no room for oversight or doubt that the very essence of the action was to enforce a lien against the funds in the hands of the bank and Buck for the full amount of the delinquent taxes, penalty, and interest. And that was sufficient to preserve for review the correctness of the action of the Court in entering judgment enforcing the lien for part but not all of such taxes, penalty, and interest.

The judgment is vacated; and the cause is remanded for the submission of additional evidence, if that is desired, for the making of complete findings of fact and conclusions of law, and for the entry of judgment predicated upon such findings and conclusions.

 

 

[49-2 USTC ¶9385]The United States , Plaintiff, v. Barndollar and Crosbie, Inc., a Corporation, et al., Defendants

District Court of the United States for the Eastern District of Oklahoma, No. 1622, Filed July 5, 1949, (86 F. Supp. 959)

Property subject to lien: Bank's liability.--Certain funds were assigned and set over to a bank to secure the payment of all indebtedness due it. On the facts, held, that these funds were not subject to the lien of the United States against the debtor for taxes.

Before STEPHAN CHANDLER, JR., District Judge.

Findings of Fact and Conclusions of Law

The above cause coming on for trial, on the 22nd day of June, 1949, at which time the parties appeared by their respective counsel, of record. The Court, after hearing the evidence and statements of counsel, makes the following finds of fact and conclusions of law:

Findings of Fact

1. The findings of fact and conclusions of law, heretofore entered in this cause, on December 17, 1946, have been vacated, and set aside.

2. The judgment heretofore rendered in this cause, filed December 17, 1946, is hereby vacated and set aside.

3. The parties have stipulated that all of the evidence and exhibits heretofore introduced in evidence in this cause, and in Cause No. 1039, Civil, shall be treated and considered as in evidence in this cause.

4. That the findings of fact, and conclusions of law, and the Judgment in No. 1039, Civil, have been, by the Court, upon its own motion, vacated and set aside in their entirety.

5. That no further evidence has been offered by the United States, in the support of its tax claim, or in support of the cause of action in its complaint herein.

6. That neither the Federal National Bank of Shawnee, Oklahoma, nor J. F. Buck, ever took over the use, management or control of the machinery, equipment or properties belonging to Barndollar & Crosbie, Inc., at any time, and never placed agents or employees in charge of the business of Barndollar & Crosbie, Inc., and never held any property in trust for Barndollar & Crosbie, Inc., and that plaintiff has failed to prove the allegations contained in Paragraph 5, of its complaint in this cause.

7. That no warrant for distraint for taxes, penalties and interests due to the United States, from Barndollar & Crosbie, Inc., was ever served upon J. F. Buck, defendant herein. That the only warrant for distraint served, was served upon Dial Currin, Vice-President of the Federal National Bank, on September 26, 1946, and there is no evidence that the said Currin was authorized to accept service for J. F. Buck; and he did not accept service for J. F. Buck.

8. That J. F. Buck has never been served with a warrant for distraint or notice or demand for the taxes involved in this action.

9. That a notice of levy was served upon Dial Currin, Vice-President of the Federal National Bank, on August 31, 1944; but that no service of notice of levy was ever had upon J. F. Buck; and the United States has failed to prove that Dial Currin was authorized to accept service for J. F. Buck; and the Court finds that service upon Currin is not service upon J. F. Buck, and no service of any kind of notice or assessment or warrant or restraint has ever been made upon J. F. Buck.

10. That the Federal National Bank did not, on August 31, 1944, and has not since said time, had any moneys, funds, or credits or other properties in its hands, belonging to Barndollar & Crosbie, Inc.

11. That at the time of the original trial of this case, on December 17, 1946, the defendant, J. F. Buck, had in his hands the sum of $15,000.00, the proceeds of a contract between Barndollar & Crosbie, Inc., and Guy H. James. The said money and contract, the proceeds thereof, had been assigned and set over to the Federal National Bank of Shawnee, Oklahoma, by Barndollar & Crosbie, Inc., by written assignment, Dated August 17, 1940, to secure the payment of all indebtedness due the Federal National Bank of Shawnee; and that said indebtedness was, at the time of the execution of the assignment, and at the time of trial herein, on December 17, 1946, in excess of $15,000.00.

12. That the Federal National Bank of Shawnee, Oklahoma, had a valid and subsisting lien upon said $15,000.00, at all times involved herein, and at the time of trial of this case, on December 17, 1946; and had the right to have said $15,000.00 applied upon the indebtedness of Barndollar & Crosbie, Inc., to the Federal National Bank.

13. That J. F. Buck is president of the Federal National Bank, and was such President at all times involved herein, and had received the $15,000.00 heretofore mentioned from Guy James, under an agreement with James and Barndollar & Crosbie, Inc., that Buck would protect James from any liability to the Jackson Materials Company, which had a suit pending against Barndollar & Crosbie, Inc., and Guy James, and under the further agreement that Buck should have the right to reimburse himself for the amount of any loss which he should sustain by reason of agreement to indemnify James against the claim of Jackson Materials Company; and with the further agreement that after the controversy between Jackson Materials Company and James had been settled or terminated, the balance of the $15,000.00, remaining in the hands of Buck, should be applied upon the indebtedness owed by Barndollar & Crosbie, Inc., to the Federal National Bank of Shawnee.

14. That neither the Federal National Bank nor Buck, on August 31, 1944, had any moneys, funds, credits, or properties of Barndollar & Crosbie, Inc., in the hands of either of them, subject to the claim or lien of the United States, for taxes, involved in this action, and neither of said parties have, at any time, since August 31, 1944, had any moneys, funds, credits, or properties belonging to Barndollar & Crosbie, Inc., in the hands of either of them, subject to the lien or claim of the United States for taxes involved herein.

15. That the defendants, Buck and the Bank, became, upon receipt of the $15,000.00 held by Buck, pledgees of said money, without notice or knowledge of the existence of tax liens against Barndollar & Crosbie, Inc.

Conclusions of Law

The Court concludes, as a matter of law:

1. That the $15,000.00 received by J. F. Buck, from Guy James, was not and has never been, subject to the lien of the United States for taxes.

2. That neither the Federal National Bank nor J. F. Buck, is liable to the United States for any part of the tax claim asserted by the United States herein, against Barndollar & Crosbie.

3. That no lien ever attached to any part of the $15,000.00 in the hands of J. F. Buck, in favor of the United States.

4. That plaintiff should take nothing against the Federal National Bank and J. F. Buck.

 

 

[39-2 USTC ¶9774]Equitable Life Assurance Society of the United States v. Allen F. Moore, et al.

District Court of the United States for the Eastern District of Illinois., No. 640-D Equity., 10/02/39

Tax lien: Priority.--In determining lien priorities the Court holds: (1) that the Government's claim was superior to that of a judgment creditor whose judgment was obtained after the Government's lien was in full force and effect, and with knowledge thereof; (2) unrecorded extensions of time for collection agreed to by taxpayer were binding on the parties herein though they had no knowledge thereof; (3) the claim of the bank in this case was superior to that of the Government by reason of a deed which antedated the Government's lien.

Green & Palmer, Urbana , Ill. , for plaintiff. LaForgee, Samuels & Miller, Decatur , Ill. , for defendants.

LINDLEY, Judge:

Findings of Fact

 

1. This court heretofore found and decreed on March 8, 1935, that the taxpayer owed the United States $5,723.52 with interest, for which it had a lien upon the mortgaged premises and the rents and profits thereof, subordinate, however, to the lien of the mortgagee. To this decree the Continental Bank was a party.

2. The Government's lien attached as against the mortgagee and judgment creditors on March 8, 1933, and by valid extensions has remained in full force to and including September 30, 1939, plus the period of litigation to enforce the same.

3. Drake claims the fund by virtue of judgment and execution obtained in 1935, subsequent to the attachment of the Government's lien. Drake knew of the Government's lien at all times subsequent to 1935.

4. The Continental Illinois National Bank & Trust Company claims the fund by virtue of a deed recorded February 21, 1933, from Moore to the nominee of the bank and by virtue of an assignment of the fund made in 1936, by Moore to the bank.

Conclusions of Law

 

I conclude as to the law:

1. The Government's claim to the fund is superior to that of Drake as its lien was in full force and effect when Drake obtained his judgment and Drake knew of the lien at all times subsequent to 1935.

2. The extensions of time agreed to by Moore , for collection of taxes were binding upon Drake and the bank.

3. The claim of the Continental Illinois National Bank & Trust Company is superior to that of the Government by virtue of its deed. If the bank's rights were based only upon its rights under the assignment, inasmuch as the latter was subsequent to the attachment of the Government's lien and the bank had notice there of by virtue of the decree of this court of 1935, its title would be inferior and subordinate to that of the Government. But the deed stands unimpeached by anything in the record, and as it antedated the Government's lien, the bank, by virtue thereof must prevail as against the Government.

4. The decree herein shall provide that the fund shall be paid to the Continental Illinois National Bank & Trust Company.

5. The costs of litigation shall be deducted from the fund and full payment made to the bank exclusive of any right or interest in the fund in Drake or the United States Government.

6. I incorporate as a part hereof all findings and conclusions contained in my memorandum of even date.

 

 

[36-1 USTC ¶9053]The Exchange National Bank of Tulsa , Plaintiff, v. Claude W. Davy, Leona Davy and The United States of America , Defendants.

United States District Court in and for the Northern District of Oklahoma., No. 1050--Equity., 13 FSupp 226, 01/07/36The United States did not have a prior lien in a mortgage foreclosure proceeding. One Davy created a trust under which he deposited $20,000 with a trust company. The trust company invested $7,000 in a mortgage note. Thereafter, on January 22, 1932, Davy borrowed $7,000 from a national bank, executing a note and assigning the assets of the trust as security. The assignment to the national bank was not recorded. Thereafter foreclosure was instituted on the $7,000 note. The deed to the foreclosed real estate was delivered to the national bank as assignee of the trust assets, and it delivered the deed to Davy, taking his mortgage for $7,000 to secure the loan of January 22, 1932. This mortgage was recorded March 2, 1934, and is the subject of this foreclosure proceeding in which the Government claims priority under a notice of lien filed on December 22, 1932, after the unrecorded assignment of the trust assets to the national bank. It is held that the filing of notice of the income tax lien after the unrecorded assignment of the trust estate did not create a prior lien in the United States . No recording of the assignment was required.

Joseph L. Hull, Charles E. Bush and James E. Bush, all of Tulsa , Oklahoma , for plaintiff. C.E. Bailey, United States Attorney and Chester A. Brewer, Assistant United States Attorney, of Tulsa, Defendant, United States of America.

FRANKLIN E. KENNAMER, District Judge:

This is an action for the foreclosure of a real estate mortgage against Claude W. Davy, and Leona Davy, his wife, in which the United States of America was joined as a defendant, because of the filing of a notice of income tax lien for income tax levied and assessed against Davy for the taxable year 1930. The evidence established the following facts: On May 7, 1930, a trust agreement was entered into between Davy and the Exchange Trust Company, and Davy deposited $20,000 in the trust estate. On November 13, 1930, The Exchange Trust Company, trustee for Davy, invested $7000 in notes executed by one Mason, the same being a part of a loan of $8000 made by the Exchange National Company to Mason, which was secured by a mortgage on real estate in the City of Tulsa . The trustee received a participation of $7000 in the $8000 mortgage from the Exchange National Company. On January 22, 1932, Davy borrowed $7000 from the Exchange National Bank, plaintiff herein, and executed his note in that amount as evidence of the indebtedness. On the same date he executed an assignment to plaintiff, assigning all the assets in his trust estate, and notice of the assignment was served on the Exchange Trust Company by the Bank. The assignment was not placed of record. On June 8, 1932, the trustee instituted suit for the foreclosure of the mortgage, which resulted in judgment, and sale of the property. The trustee was the purchaser at the sale, and on November 10, 1932, a sheriff's deed was executed to the Exchange Trust Company, trustee for Davy, conveying the property foreclosed. On June 29, 1933, the Exchange Trust Company became insolvent, and its assets were turned over to the state bank commissioner. On November 11, 1933, Davy revoked his trust agreement with the Exchange Trust Company. On February 10, 1934, the state bank commissioner, executed a special warranty deed, conveying the real estate to Davy, and delivered the deed to an agent of the Exchange National Bank. On February 23, 1934, the plaintiff delivered the deed to Davy and took from him a real estate mortgage, covering the property described in the deed, to secure the payment of the $7000 indebtedness. The mortgage was placed of record March 2, 1934. The notice of income tax lien was filed in the office of the County Clerk of Tulsa County , Oklahoma , and in the office of the Clerk of the United States District Court for the Northern District of Oklahoma, on December 22, 1932. The question presented is one of priority. The Bank was the holder of the assignment of the beneficial interest in the trust property prior to the filing of the notice of income tax lien, which property consisted of a participation in a chose in action, a note secured by real estate mortgage. The trust property had been converted into real estate, by foreclosure of the mortgage, before the notice of income tax lien was filed, but the notice was filed for record prior to the delivery of deed to the property to Davy and the execution and delivery of the real estate mortgage by Davy to the Bank. Plaintiff had an assignment of the trust, which was a lien upon an equitable estate. Davy, as beneficiary, had equitable title to the trust property; the Exchange Trust Company had bare legal title to the property, as trustee. The assignment of the trust estate was given to secure the payment of the indebtedness. It was an equitable lien. Davy continued as owner of the equitable estate in the trust, subject to the lien of plaintiff, until he revoked the trust agreement, resulting in the transfer of legal title to the property by the state bank commissioner, to the beneficial owner, but subject to the equitable lien of plaintiff. Because of the assignment of the trust to the Bank, and notice thereof to the trustee, the deed was not delivered to Davy, but was given to the plaintiff, who in turn delivered it to Davy when given a mortgage upon the property. As soon as Davy's title was changed from equitable to legal, the Bank obtained a legal lien in substitution of its equitable lien. The evidence establishes that the Bank did nothing to waive its lien, but on the contrary was diligent in preserving its security, and obtained a real estate mortgage in place of its equitable lien, as soon as the debtor was in a position to execute such a mortgage.

The question for determination is whether the filing of notice of income tax lien subsequent to the assignment of the trust estate, which was not recorded, but prior to the recording of the real estate mortgage, creates a prior right in the United States to payment out of the property over the lien holder.

The income tax lien, sought to be foreclosed in this action, was created by Act of May 29, 1928 (45 Stat. 875, 26 U.S.C.A. 115), which provides a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to the person liable for the payment of taxes. The effective time of the lien is also fixed in the Act. Section (b) of the Act provides that the lien shall not be valid as against any mortgagee, purchaser or judgment creditor until notice has been filed. Provision is made for filing notice in accordance with the laws of the state, or in the office of the clerk of the United States District Court in the district in which the property subject to the lien is situated. In the instant case notice was properly filed in accordance with the statute.

It is noteworthy that the Act provides that the lien shall not be valid as against any mortgagee until notice has been filed. It does not provide in its terms that the mortgagee shall be one who has recorded his mortgage; it does not expressly state that after notice is filed, the lien in favor of the Government shall be subject to all existing mortgages, or that the lien of the government shall be superior to them. It has been judicially determined, and properly so, that the lien of the United States in such cases, is subject to prior recorded mortgages. See Sherwood v. United States , 5 Fed. (2d) 991; Ormsbee v. United States , 23 Fed. (2d) 926. No case has been submitted which extends the ruling to unrecorded mortgages, and in my opinion, to so extend it, would open a way for fraud and wrong-doing, to the great prejudice of the Government. The Act should not be construed to declare the tax liens invalid as against a mortgagee who has not recorded his mortgage, because of the provisions relating to the filing of notice. This clearly is intended to place the Government in the same position as any other lien holder who is diligent in filing or recording liens, and it is to be accorded the same rights and benefits of the recording statutes which are given individuals. The filing of notice is necessary if the Government is to have such a lien, and thus, individuals are afforded notice before dealing with property subject to such tax liens.

The lien of the United States created by Act of Congress is a broad one. It is more extensive than mortgages and other liens in that the property to which it attaches does not have to be specified. It is general, and attaches to all property and rights to property, whether real or personal. But, the Act must be construed reasonably, and with respect to property rights of individuals. The recording statutes apply to real estate transfers and transactions; they are not applicable to personalty. The tax lien attaches to personal property, as well as rights to property, in addition to real property. The tax lien provided by the Congressional Act attaches to personal property or choses in action, subject to the existing rights of third persons. To illustrate, stocks or bonds hypothecated prior to the filing of notice of tax lien, should create a lien upon such stocks or bonds subject to the lien of the pledgee, as no recording is necessary for such a pledge. The same should follow with respect to other personal property, as chattels. It should likewise be true as to equitable liens, because such a lien generally grows out of a contract or assignment, differing widely from a mortgage or deed, and if offered for recording, could not be recorded as a mortgage or deed, and if received for recording, would have to be recorded in the miscellaneous records of the county clerk. In the instant case, the equitable lien arose by the assignment of the trust, and the trust property consisted of a chose in action, not real property, when given. No recording was required of such an assignment. The assignment became effective upon the trustee when notice of it was given; the beneficiary could not have effectively assigned the trust property to another after the first assignment, because the trustee, the legal title holder of the trust property, would have been bound to respect the first assignment. When the Government filed notice of the tax lien, such lien attached to the trust property, subject to the rights of the assignee, the plaintiff herein. If the mortgage securing the note participated in by the trust had not been foreclosed, the tax lien would have attached to the note participation certificate subject to the assignment, or lien, of the Bank. Does the fact that the mortgage was foreclosed and the security,--the land, substituted for the chose in action, as the trust property lessen the rights of the Bank and increase the rights of the Government? There is nothing in reason or equity to justify such a result. Advancing a step forward, should the fact that the trust agreement was terminated and the trust property conveyed to the beneficiary lessen the rights of the Bank and enlarge the rights of the United States ? There may be instances when such a result should follow, but in this case, the plaintiff was diligent in protecting its security. As soon as the debtor changed his ownership from an equitable (cestui que trust) to a legal one, the bank converted its equitable lien (its assignment of the trust benefit) to a legal one,--a real estate mortgage. Where there is no express waiver, an equitable lien, which has once arisen, is not waived by the subsequent taking of a legal and perfected lien to the same extent and upon the same property. See 37 Corpus Juris, 336. A contract creating an equitable lien, when not a legal mortgage, cannot be affected by failure to record as a mortgage, as required by the laws of a state to render it enforceable against creditors or purchasers without notice. Chattanooga Nat. Bank v. Rome Iron Company, 102 Fed. 755. The tax lien provided by the Act is a general lien, and it is not necessarily to be preferred over any other lien. City of Winston-Salem v. Powell Paving Co., 7 Fed. Supp. 424 at 428.

It is unnecessary to determine whether the tax lien involved herein has the effect of a judgment lien or a mortgage lien. If it is to be considered as a judgment lien, plaintiff is entitled to prevail. See Guaranty State Bank v. Pratt, -- Okla. --, 180 Pac. 376; Okla. State Bank v. Burnett, -- Okla. --, 162 Pac. 1124, 4 A.L.R. 430; Cassidy v. Bonner, 54 Fed. (2d) 234. If the tax lien has the effect of a mortgage lien, then the United States must be subsequent to the rights of plaintiff. The fact that an earlier lien is released and a new mortgage is taken, while a lien junior to the first lien is in effect, does not deprive the holder of the first lien of priority, unless there is evidence of waiver of the prior lien. See Pearson v. Harris, 200 Fed. 10; In Re F. MacKinnon Mfg. Co., 24 Fed. (2d) 156; Swift & Co. v. Kortrecht, 112 Fed. 709.

The tax lien attached to the trust property subject to the rights of plaintiff. Plaintiff preserved its lien upon the property, while it was in the trust, and as soon as it was removed from the trust, by changing its lien from equitable to a legal mortgage. The change in the form of the security held by the Bank in equity should not deprive it of its security. The tax lien continued as a lien, but subject to the lien, both under the assignment and the mortgage, of the Bank. Plaintiff is entitled to priority in payment from the proceeds of sale of the property being foreclosed, over the United States . A decree may be entered ordering the real property sold free from the tax lien, as well as the mortgage, and that from the proceeds of the sale, the costs of the action and of the sale shall first be paid; then the mortgage debt of plaintiff shall be payable, and the residue, if any, shall be paid into the registry of the court, to be paid to the Government, upon proper application therefor, in satisfaction of the tax lien. If any funds remain after such payments, they shall be subject to further distribution in accordance with the rights of the defendants, Davy.